These 5 Big Risks Are Why You Should Never Pay With a Debit Card

Save your debit card for getting cash at the ATM. On your regular purchases, a credit card is a better choice.

Debit cards have been a popular way to pay for a long time. According to recent data, debit cards are now more popular than credit cards, with 56.2% of consumers picking debit cards as their primary payment method.

People often go with debit cards because they don't want to buy anything on credit, or simply out of habit. Even though this might seem like a minor decision, there are actually several big risks to paying with a debit card. If you're one of the many consumers who make purchases this way, here's why credit cards are the safer choice.

1. Debit cards have limited fraud protection

Both debit and credit cards have legal protections limiting your liability for fraudulent transactions. However, protections are much different depending on the type of card. If your debit card is lost or stolen, the maximum amount you're liable for depends on how soon you report the loss:

• If you report it before any unauthorized transactions occur: You have zero liability.
• If you report it within two business days: You're liable for up to $50 in fraudulent transactions.
• If you report it within 60 calendar days after your statement is sent to you: You're liable for up to $500 in fraudulent transactions.
• If you report it after that time frame: You have no legal protection.

Credit cards have much more robust protections. The maximum amount you're liable for is $50. If you report the loss before any unauthorized transactions occur, you have zero liability. Most major credit card companies also take it a step further and offer zero fraud liability to all cardholders, regardless of whether they report the loss before or after fraudulent transactions occur.

2. Holds or fraudulent charges can tie up your money

Your debit card is directly linked to the money in your bank account, and there are situations where that can cause issues. If a merchant puts a hold on your account, that will tie up your money. One of the most common ways this can occur is when paying for gas at the pump. The gas station can put a hold on your account for up to $175.

The same issue could occur if there are any fraudulent charges on your debit card. Although you can dispute them, your money will most likely be tied up while the bank investigates. That could be a serious problem if it leaves you short on cash to pay your bills.

Credit cards don't have this risk, because they're not directly linked to your bank account. Holds will temporarily reduce your available credit, but that will only affect how much you can spend with your credit card. And if you report a fraudulent transaction, the card issuer will issue a temporary credit to your account while it investigates.

3. You could get charged overdraft fees if you're not careful

Overdraft fees are a common consumer frustration. Although some banks have done away with them or lowered their fee amounts, there are still plenty of banks that will charge you a hefty extra fee for having a negative balance. In fact, the average American pays over $250 per year in overdraft fees.

These fees are avoidable, but they can happen if you lose track of your balance. Or, if a merchant puts a hold on your account without you realizing, that could lead to an overdraft. For example, imagine you fill up at a gas station and pay for $50 of gas at the pump with your debit card. As mentioned earlier, the merchant could put a hold of $175 on your account. That would temporarily leave you with an available balance $125 lower than you expect.

You don't need to worry about overdraft fees with a credit card. Your card will have a credit limit, but if a transaction would put your balance over your credit limit, it will be declined.

4. It doesn't build your credit

When you use a credit card and pay the bill on time, this activity goes on your credit file. Over time, you'll build credit this way. A higher credit score can help you qualify for the best credit cards, lower interest rates on loans, and get you approved when renting an apartment or applying for a mortgage.

Debit card activity doesn't get reported on your credit file. If you only pay by debit card, then you're missing out on all the positive activity that would improve your credit score if you change your payment method.

5. Most debit cards don't earn purchase rewards

Many credit cards earn purchase rewards in the form of cash back or travel points. With the top rewards credit cards, you can earn quite a bit back on your everyday expenses. For example, there are cards that earn 5% to 6% back in their bonus categories, such as groceries or streaming services. Some consumers earn $500 to $1,000 or more per year in credit card rewards.

To be fair, there are rewards checking accounts that earn rewards on debit card purchases. However, they tend to offer much less than rewards credit cards.

When to use a debit card

For most transactions, it makes sense to use a credit card and not a debit card. You'll get more fraud protection and won't be using a payment method directly linked to your bank account. You'll also be able to build your credit and earn rewards in the process. But there are a small number of situations where you should use a debit card:

• Getting money at an ATM
• Paying for purchases that have an additional fee for credit card payments
• Making transactions that would be considered a credit card cash advance, such as wiring money

Those are all cases where using a credit card would cost you extra. Everywhere else, a credit card is the way to go.