You’re at the store and in the checkout line to pay for your items. The cashier says, “Debit or Credit?”
“Debit,” you answer.
It seems like an innocuous answer — one that doesn’t require much further thought. But your method of payment is more important than you think.
Using a debit card can be a great way to avoid credit card debt, but a debit card offers less protection and does not help you build your credit. Yet many Millennials are saying no to credit cards, opting for debit cards instead.
But is using a debit card for all your purchases a good idea? Not necessarily. Using only one payment method could potentially put you at risk.
The Rise of the Debit Card
Millennials grew up at a time when they experienced firsthand the ramifications of the Great Recession. Dealing with high unemployment and enormous debt loads and seeing their parents’ retirement portfolios tank, it’s no wonder that Millennials have a different relationship with money than earlier generations.
Debit cards seem like a safe alternative, while credit cards might seem like a gateway to more debt.
According to a survey by Bankrate and Princeton Survey Research Associates International, a staggering 63 percent of Millennials age 18-29 do not have a credit card. That’s a huge percentage of Millennials who are simply saying no to credit cards.
Aside from economic influences, there has also been some legislation that has made it more difficult for younger adults to get approved for a credit card.
Under the Credit CARD Act of 2009, credit card issuers are unable to issue a credit card to anyone under 21 years of age unless they have an adult co-signer or provide proof of income that is sufficient for repayment.
With this, the popularity of debit cards, which do a lot of the same things credit cards do, took off. But even though using debit cards and credit cards seems similar, there’s more to the conversation.
Problems of Using Only a Debit Card
Debit cards are an attractive option as they offer the same convenience as a credit card, without the potential of getting into debt. However, only using a debit card for all your purchases can be potentially risky because:
- Debit cards offer less fraud protection. According to an article on CNN, “Under federal law, your personal liability for fraudulent charges on a credit card can’t exceed $50. But if a fraudster uses your debit card, you could be liable for $500 or more, depending on how quickly you report it.” More info on that from the FTC here.
- Using a debit card does not help build credit. Building credit is an important part of your financial life. Your credit score can determine whether you get approved for an apartment, a mortgage, or a car loan.
- In cases of theft, fraud, etc. your bank account could be wiped clean. Since your debit card is connected to your bank account, criminals could quickly access your cash. It may take much longer to recoup your money after debit card fraud or theft.
- No rewards. Using a debit card often doesn’t offer any rewards. Though credit card rewards can be a slippery slope that encourages you to spend, if careful, you could rack up cash back and free travel simply by using a credit card on your basic expenses like groceries and gas.
As you can see, only using a debit card can be a bit risky, especially if your debit card gets into the wrong hands.
Should You Get a Credit Card?
I have to admit that I used to fit the bill for the quintessential cardless Millennial. For most of my adult life, I relied solely on my debit card. It wasn’t until the age of 28 that I got my first credit card. I ended up getting my first credit card for four reasons:
- A year before I got my card, I was the victim of identity theft. Nearly $500 was deducted from my checking account. As soon as I noticed, I called my bank. Luckily, they did recoup the lost funds, but my debit card was frozen and I had to wait a week to get issued a new one. It was tough not having access to either a debit or credit card for a week.
- I wanted to improve my credit to ensure I wouldn’t need a co-signer for rental applications or refinancing.
- I wanted to travel on the cheap. “Travel hacking” would give me a way of quickly accruing airline miles through credit card sign-up bonuses. (Note: this is more of an advanced strategy. You might want to hold off on this if you’re just getting started with credit cards.)
- I knew that I’d pay off my balance in full every month.
For a long time I got by just fine with a debit card — I made travel reservations, and was even approved for my first apartment without having a credit card (though I built some credit through my student loan repayment and my score was 720).
It is possible to live a life without a credit card — though it may be more difficult. Rental companies, mortgage lenders, and auto dealers all have their own credit requirements.
If you have no to low credit, you may not be approved for certain things or you may be hit with higher interest rates.
Because your credit score is what lenders use to assess your risk as a borrower, so if you have nothing to show for it, they will charge a higher interest rate.
So, should you get a credit card and stop using a debit card for all your purchases? Well, that’s up to you. It’s a good idea in general to help build credit and protect yourself against fraud. To help answer the question, think about your future goals while considering how you think you’d handle the responsibility that comes with credit cards.
Do you want to own a home one day? Travel for free? Get an affordable rate for an auto loan? If so, getting a credit card could be helpful.
If you choose not to opt in and build credit through a credit card, you’ll likely need to save a larger amount of money for bigger ticket items or be prepared to receive a higher interest rate. You can build some credit through paying your rent, utilities, and student loans on time.
Ultimately, it’s up to you, but it’s key to weigh the pros and cons and fully understand the consequences of your decision.
Do you have a credit card, or do you exclusively use a debit card?
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