Debit cards have their strengths. They don't allow consumers to rack up debt. They can let you withdraw cash from ATMs. And they can work well with a tight budget, as you can't spend more than you have in your checking account.
But for all their advantages, debit cards also come with some significant shortcomings, especially when you compare them with the best credit cards. Even if you love your debit card, here are three reasons you might want to dump it for a new credit card.
1. Build credit
Debit cards don't help you build credit. Since you're spending your own money rather than borrowing it, your bank will have no credit activities to report.
But credit cards can help you build credit. In fact, using one is one of the best ways to build your credit score. So long as you pay off what you borrow -- neither maxing out your card's credit limits nor missing payments -- your credit score should steadily improve over time.
Even if you've damaged your credit score in the past, using a credit card could help you rebuild it. For example, you could get a secured credit card, which requires a security deposit to use the card. As you build credit with a secured credit card, you'll likely build trust with your credit card provider. At a certain point, it could offer you an unsecured credit card, like a cash back card.
2. Earn rewards
Many top credit cards earn cash back or rewards on your everyday purchases. Cash back credit cards return a percentage of your spending as cash, which you can apply against your balance, transfer to a bank account, or get as a paper check. Rewards credit cards give you points or miles, which can have higher values when you redeem them for travel.
To be fair, some debit cards earn cash back, too. For example, the Discover® Cashback Debit earns 1% in cash back on up to $3,000 spent per month. Even so, earning 1% on all your purchases is lackluster compared with what's offered by the best credit cards, which can earn 2% to 10% back on your purchases.
3. Get fraud protection
The best credit cards have $0 fraud liability, which means you're off the hook for paying any unauthorized charges associated with your card. If someone were to steal your credit card information and make a $10,000 purchase from Amazon, a $0 fraud liability would mean you don't have to pay that money back. You would just report the fraudulent activity to your credit card provider, and it would take it from there.
Debit cards have fraud protections, too. But the process for reporting fraudulent activity can be lengthy, and you might lose money if you don't report it immediately. In fact, if you report it more than 60 days after it's happened, you could lose all the money that was stolen from you. Granted, that gives you 60 days, but even waiting two days could mean losing at least $50 of what was stolen.
All things considered, credit cards can earn higher rewards, offer more protection, and build your credit score. Of course, if you think you might not be able to avoid credit card debt, a debit card would be the better choice. But if you can pay off what you charge to your card, without carrying a balance, you could snag some awesome perks just by using your card frequently.
