10 reasons to use your credit card – Part 1: security


Update: the recent Home Depot security breach kicked the importance of this up one notch.

There is a high chance you have heard of the Target security breach that happened in late 2013. There was an outpouring of articles following the incident highlighting the security advantages of credit cards over debit cards. The basic idea is this: you have the ability to refuse to pay the charges on your credit cards, but you do not have this ability with debit cards. The reason is that your debit card is directly connected to your checking account and serves as basically an electronic check. Once you swipe your debit card to make a purchase, the money gets debited from your checking account immediately.

With credit cards, the bank advances you some amount of money, your credit limit, to buy things with. The purchases made on a credit card shows up as charges on the monthly credit card statement. Until you pay your balance with money from your checking account, effectively you haven’t paid for these purchases yet. If you have reasons to believe that certain charges are fraudulent, you can tell your bank that you refuse to pay these charges. Even after you pay your credit card balance, you can still dispute a charge; normally you have 60 days from when a charge shows up on your monthly statement to dispute it. Once you open a dispute, it is on the bank to prove that the charges are legitimate and should be paid for.

In the Target incident, suppose your Bank of America credit card information was leaked and used to make fraudulent purchases. When you read your monthly statement and discover charges that you did not authorize, you can tell Bank of America so, and they will remove the charges from your credit card. You have not paid for these fraudulent charges, and you will not have to. No money is ever lost.

If on the other hand your Wells Fargo debit card information was leaked and used to make fraudulent purchases, the money will get deducted from your checking account right away, so you’re out of the money until you call Wells Fargo about the charges you did not authorize. They probably will still refund you, but this will take some time, and in the meantime you don’t have access to the money that has been debited.

Money goes directly from your bank to your debit card, instantly.
Money goes directly from your bank to your debit card, instantly.
Money does not go directly from a bank to a credit card; it goes through you first.
Money does not go directly from a bank to a credit card; it goes through you first.

These days banks are doing a better job at improving debit card security, so whether it was your credit card or debit card that got compromised, it won’t take long for banks to resolve the issue. However, would you rather be out of the money first and have to claim it back, or never be out of the money in the first place?

Once I discovered credit cards almost 3 years ago, I’ve almost never bought anything with my debit cards anymore. Too risky.

-Richard

P/S: If you’re interested in reading more about debit cards vs credit cards, there is a previous post on this: Credit cards vs debit cards

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