Credit Cards Vs. Debit Cards: Why Millennials are Choosing the Wrong One
According to a Bankrate survey, 63% of millennials do not have a credit card, opting for debit cards or cash instead. This compares to 35% of adults over age 30.
What’s the deal? The survey didn’t provide follow-up questions for context, but here are some guesses…
For starters, the “millennial” generation starts at age 18. I didn’t get my first credit card until I graduated from college and got my first job. I never really had the need prior. That was true for most of my friends as well. So I think a big part of it is lack of perceived need.
Second, there has been a very vocal anti-credit card meme within the media and from many supposed financial gurus (some of whom peddle their own brand of debit cards, ironically). As a result, credit cards have a negative stigma attached to them, and many millennials have probably been scared away.
And finally, debit cards are (for better or for worse) auto-pay by default. There is an attractive simplicity in that (note: you can set up credit cards to do the same).
While this anti-credit card phenomenon, on the surface, might appear to be a good thing – appearances can be deceiving. Those who do not have debt problems and will responsibly pay their balance in full every month are actually tangibly better off using credit cards versus debit cards for the following reasons:
1. You NEED to Build a Strong Credit History
Responsibly using credit cards is one of the easiest and most reliable ways to build a strong credit history. Why is this important? Our credit scores determine if we are credit-worthy, and if so, the interest rates we should be offered given our risk profile. Without a credit history (each credit card is a line of credit that influences your credit score), it can be extremely difficult to secure loans and nearly impossible to secure the best rates.
When it comes to large loans, such as a mortgage, this can have a profound monetary impact. For example, a simple 0.5% rate increase from 4% to 4.5% on a $300,000 30-year mortgage would result in $31,680 in added interest charges!
Outside of loans, our credit scores and credit history have already been pulled in to other areas of our lives, unfortunately. Insurance companies have long used credit as a variable in determining your premium rates (offering discounts for excellent credit, for example) and 47% of employers perform a credit check in the job hiring process. The information (or lack of it) in your credit check could actually cost you the job. Pretty scary.
2. Credit Cards Usually Offer More Consumer Protection than Debit Cards or Cash
While on an international trip a few years ago, I had a debit card that was stolen from me and then used to make $400 in withdrawals from my bank account. Because it was an ATM withdrawal, I had to go through my bank for reimbursement. They did not make it easy on me and did not refund the full amount, leaving me at a loss of $50.
Had I simply used a credit card instead, I am confident that the amount would have been credited as an unauthorized transaction. Over the years, and with more than a handful of unauthorized transactions, I’ve never had a credit card company NOT credit me in full.
Under federal law, your personal liability for fraudulent charges on a credit card can’t exceed $50. But if someone fraudulently uses your debit card, you could be liable for $500 or more, depending on how quickly you report it. And while the investigation is under way, you could be out the needed funds in your account. It’s a lot less stressful to have someone elses money (credit provider) be stolen versus your own (bank account).
Then there’s cash. If someone steals a $100 bill out of your pocket or you lose it somehow, good luck getting anyone to give you $100 back.
3. Credit Cards Pay you Back
If you use a debit card to pay for essentials, such as groceries, gas, utilities, etc., then why not get cash back for it?
I get 6% cash back on groceries, 5% cash back on restaurants and gasoline, and a minimum of 1% cash back on everything else, with a variety of credit cards. This cashback – which would be ZERO with a debit card – is over $500 a year (tax-free). That’s like getting a few days of work pay for doing no work at all! Just about any/every credit card purchase will get you a minimum of 1% cash back these days.
One of the few banks that offered a cash back debit card – PerkStreet Financial – went out of business. I’m not aware of any major banks that offer cash back on their debit cards these days.
The Big Credit Vs. Debit Card Caveat
In case you missed it earlier (I bolded it for you, so no excuse!), there is a big caveat to all of these arguments – you should only apply for and use credit cards if you do not have debt problems, only use cards to pay for the essentials, have good cash flow to pay your balances, and then responsibly pay your balance in full every month.
I haven’t had a credit card balance carry over from one month to another or paid a late fee in the decade-plus I’ve been using credit cards. I realize that not everyone will be able to do have the same kind of track record, but if you can, then the benefits of credit card use definitely outweigh the negatives.