Don’t Use a Debit Card?
Yahoo! Finance posted an article by Brian O’Connell on Sunday titled “5 Places Never to Use Your Debit Card”.
When I sat down to read it, I hoped there would be something good in it, but it turned out to be fear-mongering, out-dated, and completely ignorant.
I posted the link on facebook and twitter with this comment:
“Everything about this article is wrong: http://yhoo.it/ovwYPW”
My friend, Mike, wanted to know why I thought the article was wrong, and so this post was born. I hope it helps you to understand and find misconceptions about money, debit, and the “safety” of credit cards.
What’s so bad about it?
The article lists 5 places you should never use your debit card. Inhernent in the post is the idea that it would be better to use your credit card in these cases. O’Connell lists the 5 places and explains why credit is better than debit.
You know I’m not a fan of credit cards, but even if I was, the information in this article assumes 3 things that aren’t true:
- Everyone has a credit card.
- No one plans spending.
- We live in the year 2005
With that in mind, here is my response to “5 Places Never to Use Your Debit Card”.
5 Places Never to Use Your Debit Card
1) Rental or Security Deposits.
The idea goes like this:
- Big rentals (like cars or heavy machinery) require a deposit.
- That deposit can be a few hundred dollars.
- If you use a debit card, the hold money is unusable.
- If you use a credit card, the hold money doesn’t effect real money.
- Use a credit card.
It sounds like a good argument until you think it through. First off, most people don’t rent heavy equipment so the only deposit that would even show up on a rental agreement is on a car rental or hotel stay.
In the case of a car rental, the deposit is not a surprise. The main reason to rent cars is when traveling and traveling expenses are almost never surprise expenses. If you plan a little bit, that car rental deposit won’t even effect your trip. And if you are going on a trip, you should plan for it anyway. This makes car rentals a non-issue.
For hotel rentals, the only deposits come out on patrons who don’t pay in advance. If you don’t pay in advance the hotel puts a hold on your account for the amount of money you will be spending nightly on the hotel. If that’s the case it is money you were going to spend on the hotel anyway and it is a non-issue. If you pay for the hotel in advance, they won’t put a hold on your card anyway.
As for other rentals, like the car, they should be planned out in advance. If a real emergency comes up and you suddenly need a deposit for some equipment, tap into your emergency fund for a day or two and replenish whatever money you used when the deposit is released back into your account.
2) Restaurants and Bars.
This one doesn’t even make sense. The author says,
“There are way too many prying eyes around a dining establishment to trust using your debit card. Apart from the risk of having your card stolen, restaurants are one of those rare places where someone actually walks away with your card and you don’t see them for a few minutes. Much better to use cash when dining out.”
Although I like the idea of using cash when dining out, there is no reason to be afraid of using a debit card at a restaurant.
First off, since they don’t have your pin number, there is no way for the restaurant to tap into your checking account. Instead, they have to run your card through the Visa or Master Card system. When a debit card is used without a pin it is treated like a credit card and you receive 100% protection from Visa and Master Card.
If someone does steal your card and starts using it, most banks are very good at catching it and will release the funds back into your account almost immediately.
Unless you are completely paranoid, there is no reason to forgo using your debit card at restaurants and bars.
3) Regular Payments
This one completely baffled me.
He says never to use your debit card because “if there’s a dispute, the business won’t take the cash right out of your checking account”. He isn’t saying auto-payments are bad, but in a worst case scenerio you may lose some money temporarily.
Like all things, you should be careful who you allow into your checking account. Currently my car insurance, utilities, internet, phone, and soon my rent all come directly out of my checking account every month. There is nothing scary or evil about automating payments. All of these companies post my bill several weeks before the payment date and any problems I have had have been resolved quickly.
Plus, banks are good about responding to complaints. In the rare instance it hurts you financially (and it is rare) you can temporarily tap into your emergency fund to cover the difference.
4) Wi-fi Hot Spots
“Never use your debit card for an online purchase while at a coffee shop or other business that offers free Wi-Fi access.”
This one isn’t as bad as the others. First off, no that you should never pay for wi-fi. If the business you are in requires it, walk across the street and get free wi-fi at starbucks.
With that said, it’s probably a good idea to avoid using your debit or credit card while in a wi-fi hot spot. You never know who’s watching your connection, and it’s fairly easy to crack encrypted data transmitted over a wi-fi connection.
But to do that, the hacker would have to be specifically looking at your connection and decoding it (probably not happening).
So while it may be more dangerous to use your card at a wi-fi spot, unless you have reason to believe someone knows you are doing it, it’s probably safe.
5) Any retailed where you choose the “credit” option
“the real problem is the delay when choosing credit — you may forget the purchase and not account for the money.”
What O’Connell is saying in this point is if you choose “credit” instead of “debit” when using your debit card it will take a few days to show up on your account and you might think you still have this money. Here is the problem with that.
Assume your identity is stolen because of a transaction at a retailer. If you choose the debit option you only get your bank’s protection. If you use the credit option, however, you get Visa and Master Card protection (full 100% recovery guaranteed).
This also assumes you don’t budget at all. If you have a budget (like I recommend) you would already known how much you were going to spend at that store, you would update your budget to show you had spent that amount, and it wouldn’t be a problem.
Not a fan
If it’s not obvious already, I wasn’t a fan of this article. Debit cards have come a very long way in the past few years. Security is better than ever. And with a budget, there is no reason to fear overspending.
Where do you think it is better to use credit instead of debit?
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Alex,
Thanks for helping us think this through. I like this quote from your post: “When a debit card is used without a pin it is treated like a credit card and you receive 100% protection from Visa and Master Card”.
I have a hunch most people don’t know this. As for me, I don’t have any credit cards, but I always run my debit card as a credit card. Am I being clever? Well, maybe. Besides, I don’t even know my PIN, so I couldn’t use it if I wanted to.
I do the same thing!
I am one of those people that did not realize this! I ALWAYS use my debit as a debit card. Interesting.
It costs the retailer slightly more, but it protects you A LOT better.
My bank actually gives us 1% cash back for choosing credit over debit. Not a ton of money, but it’s a good enough reason for me to use my debit card. PLUS, I don’t have to go through the arduous task of typing out my 4 digit PIN. hehehe
That’s awesome! I love when banks do stuff like that.
I used to work at a hotel, and we often had problems with debit cards. Granted that was 7 or 8 years ago. We would have problems where the money would get held for someone’s stay and then when we charged them for the stay, the hold would still remain for weeks. Apparently, it didn’t work that way with credit cards. That’s what I remember but I’m sure it’s changed since then.
A local store would give you a discount if you used debit instead of credit. I’m assuming because they didn’t have to pay the 2–3% to the credit card companies if the transaction was done through debit, but I don’t know if that’s changed either.
I really see the two as being pretty much the same, to be honest. I don’t think of it any differently if it’s a debit card or a credit card. I like to use the debit card simply because then it all goes on one account and is easier to keep up with along with checks, deposits, etc.
The only reason I’ve thought about using more credit is to get points for all the various rewards programs. If you’re disciplined enough to do it, then it seems to me like “why not?”
The main difference is where the money comes from. Debit cards use actual money where as Credit cards use future money.
Although it use to be a really bad idea to use a debit card at the places you mentioned, they have really gotten their act together. Also, you mostly pay in advance for hotels anymore.
We’ll have to chat another time about credit card points. lol
Thanks for the comment!
Alex thanks for breaking each “myth” in the article. It always annoys me when I see these types of articles and read the misinformation they contain. The one that gets me the most if the one about renting a car or a hotel with a debit card as I have done it many times and have never had any problems with it.
I’m the same way. I’ve heard this several times but can’t come up with any legitimate stories that have happened in the last few years.
Interesting read; I had not read anything about the debit versus credit debate in a long time, because I’ve not touched a credit card in a long time.
I don’t think the author of the article set out to be a shill for The Credit Card Companies per se, but I do think his line of thinking was based in a fallacy that society at large still believes, which is that responsible use of credit is a winning financial decision.
Regarding the “Heavy Equipment Rental” part, I had an interesting experience the last time I went to Texas. Even though I had enough cash in my checking account to cover the cost of the car rental two times, I was denied the rental when I went to pick the car up. The reason? I didn’t have a CREDIT card. Somehow, apparently, I didn’t have a high enough FICO score to rent the car without having an actual credit card to charge the deposit. The only reason I could think is that they were worried I’d steal the car, but they had all my other information; name, address, SSN. And I’m sure rental cars nowadays have GPS trackers in them. It just blew my mind.
Needless to say, I had to go to a competing rental place that didn’t rent solely on the basis of a FICO score. I only had to give them a cellphone statement and a copy of my last check stub, and they were actually slightly cheaper than the other place that denied me. (Mad props to Enterprise Rent-A-Car on that basis alone!)
I have heard of this. Some car rental places REQUIRE a credit card. It’s ridiculous in this day and age. Even if you put the deposit on a credit card, how can they know your limit is more than a few hundred bucks? It wouldn’t help them any more than a debit card with not enough money inside.
Thanks for relaying the story, Tim! And thanks for letting us know to get our rentals from Enterprise from now on! lol.
Like you, it has been awhile since I’ve read a “credit vs debit” article (especially one that favors credit cards). There rarity is one of the things that made this article stick out for me.
I actually sent a Thank You letter to the corporate offices about this. If you’re interested in reading it, here’s the original text, sent on January 10, 2010:
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This correspondence is regarding a rental I made from the Phoenix East location (2834 N 44th St., Phoenix) for the middle of December 2009 (the 11th to the 22nd.)
I needed a car rental for a vacation I was planning to Dallas. I had originally made my reservation through Avis, feeling their rates were reasonable. When I went to pick the rental up, my reservation was declined. Apparently, my FICO score was too low to be approved (because, as everyone knows, the best indicator of one’s responsibility is the “I love debt” score.) I had saved up more than enough for the rental in my debit account, but since I don’t worship at the altar of credit, I was still denied.
I was worried about being able to complete my trip, but I knew that your Phoenix East location was close by. I went there and your team there was nothing but helpful. Not only was I allowed to rent (by obtaining proof of income and residency), but they answered all of my questions and were very informative.
Your rates were also very good; I paid no more for renting the car at the last minute (and with an extra day) than I would have having made a reservation six months in advance at Avis.
I just wanted to extend my thanks to Enterprise and to your team at Phoenix East for not only saving my trip but also making me a regular Enterprise customer.
Regards,
~Timothy Davis
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That’s awesome, Tim!
I don’t write enough thank you emails. It’s that kind of stuff that really gets things done.
Did you ever get a reply back?
Hi Alex,
I just stumbled into your blog and want to add the following: Last year I went for holidays to La Gomera, which is one of the Canary Islands (Spain). For the deposit of the prebooked rental car they charged the deposit not only by “freezing” it on the account of the credit card but by really charging. That means: While I used the car, my account had been charged and only after returning the car the money went back on my account. Meanwhile I wrote red numbers. The agency associated to the ADAC, the German Automoblist Club, told me that this habit becomes more and more usual and that the deny any responsiblity for this behavior.
Greetings from Gemany
Rhinebear
Yeah, that’s not unusual. But like all things, if you use a debit card you should plan for that deposit.
Thanks for the info, Rhinebear! It’s really cool to see a reader from Germany