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I know everyone has heard people say that “credit cards are evil” and that “cash is king.” While I’m sympathetic to those that believe these adages, I also respectfully disagree. And I’m going to tell you why you should avoid using a debit card for purchases while traveling or even in your daily life.
Why people hate credit cards
I get at least one message a week from people saying that credit cards are evil and that Dave Ramsey says that I should cut up all my cards. Though the intention is sound, the advice is a bit extreme. While I like to talk about credit card rewards on this site, it only makes sense if you’re someone who doesn’t carry a balance and pay interest. In fact, I always tell people during my credit card consultations that they should treat their credit cards like debit cards and only spend within their means.
I understand why Dave Ramsey and many other personal finance advisors do not recommend using credit cards. When put into irresponsible hands, they can ruin your financial life. Using credit cards responsibly requires discipline and effort. You need to have your financial house in order so that you know that you’re only spending within your means and are able to pay your bills on time.
For those of you that are into points and miles, this might seem like a no-brainer. Though I want to explore the reasons why you should avoid using a debit card for purchases, both in your daily life and especially when traveling!
Reasons why you should avoid using a debit card for purchases
1. Temporary loss of funds:
If you encounter a situation where there is a fraudulent purchase on your debit card, you can report it to your bank. However, the disputed amount becomes unavailable on your account while the bank investigates the charge. This could be a problem if someone were you steal your debit card and drain your account with fraudulent purchases. While you’ll likely get the money back, it might take a while. This could leave you scrambling to pay bills from your checking account.
Hotel and fuel purchase holds
Hotels and fuel purchases can also result in a temporary hold of your funds. For gas stations, this is meant to verify that you can make the purchase. Hotels use the hold to guarantee that you can pay for any incidentals or damages to the room. On a credit card, this is usually not an issue if you have a sufficient credit limit. However, this could be problematic on a debit card, especially if it causes an overdraft.
Reducing your risk by using the issuer’s money
This is one of the biggest reasons why I always recommend using a credit card over a debit card. With a credit card, you’re essentially using the issuer’s money, then paying them back at the end of your statement cycle. Since it’s the issuer’s money that’s being spent, there is more urgency to resolve it than when it’s just your funds that are lost.
2. Lack of fraud protections:
Electronic Fund Transfer Act
Debit cards present a lot more risk when it comes to fraud protection. Since debit cards are regulated by the Electronic Fund Transfer Act, you can be liable for more than you think. The regulation says that if you report unauthorized activity within two business days, your liability is $50. If you miss the two-day window, you’re now looking at $500. And what’s worse, if you don’t report it within 60 business days, you could be liable for the entire amount.
Fair Credit Billing Act
Credit cards, on the other hand, are regulated by the Fair Credit Billing Act. The Fair Credit Billing Act limits the cardholder’s liability to $50 for unauthorized or fraudulent purchases. Whether you detect the activity at the end of the week or on your statement balance, your liability is much lower when using a credit card.
Where you’re likely to experience fraud
You should be aware that the most common places to get fraudulent charges are at gas stations, restaurants, and ATMs. These are places where thieves will often use skimmers to collect your information. Gas stations and ATMs tend to be unattended and are vulnerable to people tampering with their systems. Restaurants in the US are also a vulnerable place. We’re accustomed to handing over our card to the staff and having them process it away from view.
3. Lack of travel protections:
Some of the most overlooked benefits of a credit card are travel protections and benefits. This includes lost or delayed baggage protection, trip cancellation coverage, trip delay reimbursement, travel accident insurance, and primary car rental insurance coverage. Some or all of these benefits are found in popular travel cards like the Chase Sapphire Preferred and Reserve, American Express Platinum, and Capital One® Venture Rewards® Credit Card.
Most debit cards do not have any of these benefits or protections, which means that you’re at risk if anything happens. This might not be an issue for every day spend. However, for travelers, having these extra protections can make all the difference when dealing with issues.
4. Foreign transaction fees:
Most debit cards will charge you a foreign transaction fee to use the card for purchases when abroad. These fees generally range from 1-3% per purchase. Most basic credit cards also have this issue. Though most credit cards that are marketed as travel cards do not have a foreign transaction fee. This means you can use the card without incurring extra fees, and the bank will convert the charge using market rates.
Reminder: Always pay in local currency!
Don’t get tricked into paying in US currency while traveling abroad. You’ll often be asked whether you want to pay in US dollars when paying for purchases when overseas. This might seem like an effective way to avoid foreign transaction fees. However, it doesn’t work. You’ll not only get hit with the foreign transaction fee, but you’ll usually get an adjusted price since the merchant will use their own conversion rate. It’s better to pay in the local currency and have the bank perform the conversion. And, of course, without any foreign transaction fee!
5. Lack of rewards:
One of the main drivers of using a credit card is the opportunity to gain rewards. Cards like the Chase Sapphire Preferred and Reserve earn a bonus on travel and dining expenses, including hotels, Airbnb stays, flights, tours, train tickets, and much more. In fact, Chase has a huge list of charges that qualify as travel expenses. And since traveling can be an area where we tend to spend more money, it’s nice knowing that you are earning a bonus in the process. Using a debit card or cash often means that you’re “leaving money at the table” that could be used for future travel.
I know some debit cards and checking accounts have rewards associated with them. However, if you combine all the previous factors, it’s hard to argue that debit cards are better to use than credit cards when traveling.
What about ATM withdrawals?
Withdrawing cash from an ATM is a common scenario and is often a better method than using the currency exchange booths at the airport. This is because you’ll often get the standard exchange rate and pay less in fees. Though there are some ways to minimize the risk.
Use a secondary checking account
One way is to use a debit card for a bank that isn’t your primary checking account at ATMs when traveling. That way, if the account is compromised, your primary checking account isn’t exposed and potentially locked or drained.
Get a checking account that reimburses ATM fees
I have a Charles Schwab High Yield Investor Checking account that doesn’t charge any fees and offers a debit card that reimburses for ATM transactions fees, even when traveling abroad. I’ll transfer money from my primary checking account into the Charles Schwab checking account, then use the debit card to get money from the ATM. If the card is stolen or the account is compromised, the risk is confined to that account rather than my primary checking account. And if the bank needs to do an investigation, I don’t have to worry about my account getting locked or frozen.
I also like this approach since I can use the ATM more often to retrieve smaller amounts of money. In the past, I would use the ATM less when traveling to avoid the fees but withdraw a large sum of cash. Since I’ve had cash stolen twice while traveling, I prefer to carry less of it whenever possible.
Charles Schwab isn’t the only bank account out there that offers this benefit. However, I’ve had an account with them for years and it’s worked flawlessly. You can earn $100 when opening an account by using our referral code.
Do I even carry my primary debit card?
I still carry my primary checking account debit card while traveling, but I’ll leave it with my passport in the hotel safe. I want to have access it to in case of an emergency, but I don’t want to be carrying it around while I explore a location.
Using mobile payments
If you’re determined to use your debit card for purchases while traveling, you may want to consider using a mobile payment system like Apple Pay and Google Pay. These transactions are more difficult to intercept since they use token and biometric authentication. Though keep in mind that acceptance may be limited depending on where you’re traveling. In most large cities in Europe and Asia, you should be able to use mobile payments to pay for most items. This is even the case for many restaurants. In fact, I’ve seen more places abroad that accept mobile payments than here in the US!
Though keep in mind that you’ll likely still have to contend with the foreign transaction fees if you use a debit card. That’s why it’s still a better solution to use a credit card when traveling.
Do you use a debit card when traveling or even in your daily life? Do you think I am crazy for going against Dave Ramsey’s recommendation?
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