Kenny Holloway

Credit Card or Debit Card When Traveling

1/23/2020

Credit cards are evil and cash is king, right? You may be sympathetic to those that believe this adage but let's look at the difference between processing your debit card as a debit(by entering your PIN) or as a credit, often followed with a signature. To the point, you should avoid using your debit card as DEBIT and use the CREDIT option instead. This recommendation will likely stir some objection from folks listening to popular financial advisers.

However, using your Debit card for credit only makes sense if you're someone that doesn't carry a credit card balance and have to pay interest. You should also treat your credit cards like debit cards and only spend money you actually have in current cash deposits; do not include scheduled deposits that have not cleared yet. Well known public finance advisers do not recommend using credit cards when they are in irresponsible hands that can ruin your financial life. Using credit cards responsibly requires discipline and effort. One should have their financial house in order so they know they're only spending within their means and they are able to pay the bills on time. Rewards cards that offer points and miles are an obvious reason as to why it's better to use a credit card; but then pay it off on time.

Traveling can be stressful and expensive, so let's focus on ways to make travel easier, affordable and more enjoyable. Travel comes with many risks, and there are reasons to avoid using a debit card for purchases while traveling:

  1. Temporary loss of funds: if you encounter a situation where there is a fraudulent charge on your debit card, you can report it to your bank. However, what usually happens is the disputed amount becomes unavailable on your account while the bank investigates the charge. This could be a real problem if someone were to steal your debit card and drain your account. While you would like to get the money back, it might take some time and could cause problems paying bills from your checking account.
  2. Hotels and fuel purchases: these can also result in a temporary hold of your funds. This is usually meant to verify you can make the purchase and hotels use the whole guarantee to ensure you can pay for any incidentals or damages to the room. On a credit card. This usually isn't an issue if you have a sufficient credit limit. However, this could be a lot more problematic on a debit card, especially if it causes an overdraft. This is one of the biggest reasons why it is recommend using a credit card over a debit card. With a credit card you are essentially using the issuers money and then paying them back at the end of your statement cycle. Also, since this is the issuers money that's being spent, it seems like there's a lot more urgency to resolve it than when it's just your funds that are lost. In any case, using a credit card provides an extra layer of protection, especially when there's a fraudulent charge.

Debit cards present a lot more risk when it comes to fraud protection. Since debit cards are regulated by the Electronic Funds Transfer Act, you can be liable for more than you think the regulation says. If you report unauthorized activity within two business days, your liability is $50. If you miss the two-day window, you're liability is $500. And what's worse, if you don't report it within 60 business days, you're liable for the entire amount!

Credit cards, on the other hand are regulated by the Fair Credit Billing Act. The Fair Credit Billing Act limits the liability to $50 for card holders for unauthorized or fraudulent purchases. This is true whether you detect the activity at the end of the week or on your statement balance. So level of fraud protection is much higher when using a credit card.

It is good to be aware that the most common places for fraudulent card activity are gas stations, restaurants and ATMs. These tend to be the places where thieves will use scammers to collect your information. This is especially a problem at gas stations and ATMs because they tend to be unattended and vulnerable to people tampering with the system. Restaurants in the US are also a vulnerable place. Because we're used to handing over our card to the restaurant staff where they process the card away from your view.

Debit cards also lack travel protections. One of the most overlooked benefits of a credit card is the ancillary travel protection and benefits like loss and delayed baggage protection, trip cancellation coverage, trip delay reimbursement, travel accident insurance and primary car rental insurance coverage. Most debit cards do not have any of these benefits or protections, which means you're at risk if anything were to happen. Having these extra protections can make all the difference when issues arise.

Finally, most debit cards will charge you a foreign transaction fee to use a card for purchases abroad. These fees generally range from 1-3% per purchase. A lot of credit cards also have this issue, however, most credit cards that are marketed as travel cards do not have a foreign transaction fee. This means you can use a credit card without incurring extra fees and the bank will convert the charge using market rates. PRO TIP: Don't get tricked into paying in US currency. When traveling abroad, you'll often be asked whether you want to pay in US dollars when making a purchase. This might seem like a way to avoid the foreign transaction fee but it doesn't work. You'll often get hit with a foreign transaction fee, plus you'll usually get an adjusted price, as a merchant will use their own conversion rates. The best way is to pay in the local currency and have the bank perform the conversion; of course without any foreign transaction fee.

One of the main drivers of using a credit card is the opportunity to gain rewards. Some cards, earn a bonus on travel and dining out expenses including hotels, AirBnB, flights, tours, train tickets and much more. Since traveling can be one area where you tend to spend more money it's nice knowing you're earning a bonus in the process. In fact, using a debit card or cash often means you're leaving money on the table that could be used for future travel. Some debit cards and checking accounts have rewards associated with them, however, if you combine all the previous factors it's hard to argue that debit cards are better to use than credit cards when traveling.

A question that you might be asking is, What about when you need to use a debit card to get cash at the ATM when traveling? Withdrawing cash from an ATM is a common scenario and is often a better method than using the currency exchange booths at the airport. This is because you'll often get the standard exchange rates and pay less in fees. There are some ways to minimize the risk. One is to use a debit card for a bank that isn't your primary checking account at an ATM when traveling. That way, if the account is compromised, you're not stuck with having your primary checking account locked or drained.

Some investment companies have a high yield, investor checking account that doesn't charge any fees and offers a debit card that reimburses for ATM transaction fees, even when traveling abroad. You can use a strategy like trasfer some money from your primary checking account into the investment checking account; then use a debit card to get money from the ATM. If the card is stolen or the account is compromised, the risk is mostly confined to that account rather than your primary checking account. That way, if the bank needs to do an investigation you don't have to worry about your account getting locked or frozen. Another benefit to this approach is you can use your ATM more often to retrieve smaller amounts of money rather than just using the ATM once and getting a large sum of cash. We've all heard of having cash stolen twice when traveling. It's a risk. Financial products change regularly so inquire at your bank or broker.

Consider carrying your primary debit card while traveling, but leave it with your passport in the hotel safe. You’ll have access to it in case there's an emergency and that will mitigate the risk of carrying your debit card while you explore.

Another tip that you can use if you're dead set on using your debit card for purchases while traveling is to use it via a mobile payment system like Apple Pay and Google Pay. It is generally more difficult to intercept a mobile transaction that uses some kind of token or biometric authentication. It's also usually safer to use it for purchases, though keep in mind acceptance may be limited depending on where you're traveling. Most large cities in Europe and Asia should be mobile payment friendly. Mobile payments are usually accepted at restaurants as well. In fact, more shopping establishments abroad accept mobile payments than in the United States.

Whether traveling abroad or shopping local, it makes sense both in risk and reward to use a credit card for purchases. They key is to have a control measure in place so as not to spend more than you have in available cash in the bank to cover your purchases. Risk the issuer's money instead of your own, pick up rewards, many of which result in a direct cash spend reduction on future purchases.