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Credit Cards

3 reasons why young people should stop using debit cards

CFP Danielle Harrison offers her advice to young debit cardholders.

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People rely on debit cards to cover their purchases for all sorts of reasons.

Consumers might feel more comfortable using a debit card, knowing they have the funds to pay for something since the money comes directly from their checking account. Perhaps debit cardholders prefer carrying cash or fear going into debt if they used a credit card instead.

While spending with a debit card may not seem like a problem now, it's not helping the future financial you because they won't help you build a credit score like credit cards can. With a good credit score, you have greater approval odds for the top credit cards and can score lower interest rates on loans. Not to mention, most credit cards offer rewards like points, miles and cash back on your purchases.

Below, Danielle Harrison, a Missouri-based CFP at Harrison Financial Planning, weighs in further on why young people should stop using debit and opt for a credit card instead.

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1. You don't build credit with a debit card

Having good credit is important when you're working to achieve some of life's biggest milestones, like purchasing your first home. It's crucial you start building credit early on so that by the time you need to make these big life decisions you have a solid credit history to help you get the best rates.

A debit card draws money directly from your checking account when you make a purchase, which means that the transaction ends there. Nothing is reported to the credit bureaus and nothing shows up on your credit report, good or bad.

On the other hand, a credit card is basically money cardholders borrow and need to pay back. Using a credit card can give financial institutions some insight into an individual's payment behavior. Do you pay your bill on time each month? Do you pay it off in full?

This information gets reported to the credit bureaus and goes onto your credit report. If you pay on-time and in-full each month, it will help you improve your credit score. And a solid history of on-time payments will show financial institutions that you're capable of managing more credit (or borrowed money) in the future.

"One of the biggest advantages of using a credit card for young adults is that they can begin to build their credit history," Harrison says.

Don't know where to start? Consider a card like the Petal® 2 "Cash Back, No Fees" Visa® Credit Card. It's a good choice for applicants who may not have any credit history whatsoever (if you do have a credit history, however, that does factor into the credit decision). When you apply, the issuer WebBank may look at your linked bank accounts during the application process, analyzing your account activity and other data like bill payments and earnings, to determine your eligibility. The Petal 2 Credit Card charges no fees, has no required deposits, and offers a cash-back rewards program that encourages on-time monthly bill payments.

2. A debit card doesn't offer the same fraud protection

You don't get the same level of protection with a debit card if someone steals your information.

If a stranger were to find your debit card, they could essentially use all the money in your linked checking account. While you can get your money bank when you report debit card fraud, it may take time or you may not be reimbursed at all.

"With a debit card, your personal funds are gone, and you must work to get those back," Harrison says. "Depending on when you report the missing card or fraud, you could potentially be liable for the entire amount. A credit card can give you a leg up if it has been compromised."

Credit cards offer better protection from fraud if someone makes unauthorized purchases in your name. You won't be held responsible for unauthorized purchases as long as you report the incident. And while federal law limits your liability to $50, many credit card issuers offer zero-liability protection.

3. Debit card rewards pale in comparison to credit card rewards

There are some debit cards that offer rewards, though not many. The Discover Cashback Debit Account links to a debit card that provides cardholders 1% cash back on up to $3,000 in debit card purchases each month. Those who take full advantage of these rewards can earn up to $30 cash back per month and $360 annually.

The rewards you can earn using credit cards are much more robust, whether you're shopping for groceries, filling up at the tank or dining out. Cardholders can redeem their points and miles for things like gift cards and travel. And credit cards that offer cash back help you to pay your bill when you redeem the rewards as a statement credit.

The Wells Fargo Active Cash® Card, for example, offers unlimited 2% cash rewards on all eligible purchases, and your cash rewards can be redeemed as a statement credit, through a Wells Fargo ATM by using a Wells Fargo debit or ATM card, as a direct deposit into a Wells Fargo savings or checking account or as a paper check. The no-annual-fee card also offers new cardholders a welcome bonus of $200 cash rewards after spending $1,000 in purchases in the first three months from account opening.

Wells Fargo Active Cash® Card

On Wells Fargo's secure site
  • Rewards

    Unlimited 2% cash rewards on purchases

  • Welcome bonus

    Earn a $200 cash rewards bonus after spending $1,000 in purchases in the first 3 months

  • Annual fee

    $0

  • Intro APR

    0% intro APR for 15 months from account opening on purchases and qualifying balance transfers; balance transfers made within 120 days qualify for the intro rate

  • Regular APR

    18.74%, 23.74%, or 28.74% variable APR on purchases and balance transfers

  • Balance transfer fee

    Introductory fee of 3% for 120 days from account opening, then up to 5% ($5 minimum)

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees, terms apply.

What to watch out for when using credit cards

Credit cards are a smart financial tool to add to your wallet, but only if you can control the urge to overspend when you use them.

"If you don't feel like you have the discipline to keep your spending in check, or if you can't pay off the card on a monthly basis, using a credit card is not right for you," Harrison says. "Because of the high interest rates associated with most cards — typically in the double digits — carrying a balance can be costly and is not a good long-term financial strategy."

There are other reasons when paying with credit isn't better, and they have to do with your spending habits. Here are some things to watch out for before using a credit card:

  • Only buy what you can afford to pay off in full when your bill comes.
  • Keep track of how close you are to your credit limit.
  • Don't make it all about the rewards because you might end up going into debt just to reap points, miles or cash back.
  • Watch out for additional costs when swiping your credit card as some merchants charge processing fees.

Bottom line

The longer your credit history is, the better. This is why young people should opt to use a credit card over a debit card. It's fine to keep a debit card on you, but using credit for everyday purchases will help you build a credit profile, keep you better protected from fraud and even reward you more for your purchases.

If you feel tempted to overspend with a credit card, reserve a certain amount of spending money for your credit card and use debit for the rest. This way, you can build credit and avoid going into debt.

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Petal 2 Visa Credit Card issued by WebBank.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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