Alright, I’ll do it. I’ll address one of the most common questions we are asked. In our days of the decline of the use of cash, increasingly people are using plastic. In fact, you probably have at least one credit card and one debit card in your wallet. It’s a tale of two cards. This leads people to ask an often-confusing question: Which card should I use?
The convenience and protection that a debit and credit car offer are hard to beat in many instances, but they have important differences that could substantially impact your finances. Here’s how to choose.
Alike but different
Credit and debit cards typically look almost identical, with 16-digit card numbers, expiration dates and PIN codes. But that’s where the similarity ends. Debit cards allow people to spend money that they have by drawing on funds that they deposited with their financial institution. Credit cards allow consumers to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash.
Credit cards are issued as either standard cards, which simply extend a line of credit to its users; reward cards, which offer cash back, travel points or other benefits to customers; secured credits cards, which require an initial cash deposit that is held by the issuer as collateral; and charge cards, which have no preset spending limit but often do not allow unpaid balances to carry over from month to month.
There are many reasons why it makes sense to use one type of card over the other.
Debit Cards
Fees – Frugal consumers prefer to use debit cards because they usually have few or no fees of any kind, unless users spend more than they have in their account and incur an overdraft fee. A 2015 report, by reporting entity TNS, revealed that about 60% of consumers who used debit cards did so because it felt more like using real money. The no fee advantage doesn’t hold for prepaid debit cards, which frequently charge activation and usage fees, among other costs. By contrast, credit cards generally charge annual fees, over limit fees, late payment fees and a plethora of other fees and penalties, in addition to monthly interest on the card’s outstanding balance.
Controlling spending – A debit card draws on money the user already has. Compulsive spenders would do well do use debit cards and avoid the temptation of credit; retailers know people usually spend more using credit cards than if they were paying cash. Interest and other charges paid by those who don’t pay off their balances fund can deny many of the use of user benefits people get from credit card companies.
Credit Cards
Rewards – Unlike with debit cards, credit card users can reap cash, discounts, travel points, and many other perks, by using reward cards. Smart consumers who can pay off their cards in full on time every month can profit substantially by running their monthly purchases and bills through them.
Credit scores – Credit card use is also reflected on the customer’s credit report, which allows responsible spenders to raise their scores with a history of timely payments.
Warranties – Credit cards can also provide additional warranties or insurance for items purchased that may exceed those of the retailer. For example, if an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, check with the card company to see if it will provide coverage.
Legal protection – These are also notably different, with credit cards offering more security.
Liability for lost or stolen cards – Credit cards still offer much greater protection in most cases for those whose cards are lost or stolen. If the customer reports the loss or theft in a timely manner, their maximum liability for purchases made after the card disappeared is $50.
It’s a little more complicated for debit cards. You may be held liable for unauthorized if you voluntarily disclose the PIN, fail to notify the issuer within a reasonable time that the card has been lost, stolen, or misused, or if the PIN knowingly becomes known to someone other than yourself. You won’t be held liable for losses that exceed your daily withdrawal limit. However, you may lose more than the amount of money in your account if your debit card has a line of credit or overdraft protection or is linked with another account.
Disputing transactions – Financial Institutions allow credit card users to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping. But if the item was bought with a debit card, it cannot be reversed unless the merchant is willing to do so. What’s more, debit card victims don’t get their refund until due process has been completed. Credit card holders, on the other hand, are not assessed the fraudulent charges made in their names. While some credit and debit card providers offer zero-liability protection to their customers, the law is much more forgiving for credit card holders.
Car rentals – If you need to rent a car, most credit cards provide some sort of waiver for collisions. Even if you want to use a debit card, many car rental agencies require customers to provide credit card information as a backup. The only way out may be allowing the rental agency to put a hold of perhaps a few hundred dollars on their bank debit card as a form of surety deposit.
Smart shoppers who can control their spending are probably wise to reap the benefits offered by credit cards for most their purchases. Debit cards protect the frugal from fees and ensure that less disciplined spenders stay within their means. Which card is the most appropriate is therefore a personal choice based on your character. Working with a financial advisor is one way of assessing which combination of cards is best in your situation. Like everything in life, scenarios vary. Finding the one that best works for you in a way of Keeping Life Current.
