For many years the financial community has debated the issue of debit vs. credit cards. There are those (like me) who love debit cards. And, of course, there are those that hate them. Plus, there is that contingent that says we shouldn’t use either but should pay cash for everything. The problem is that cash just isn’t practical for all spending. The fact is that there are times when it is either impractical or impossible to use cash.
The major differences
There are several big differences between debit cards and credit cards. For one thing there is the availability of funds. When you use a debit card the money comes directly out of your checking account. If the transaction required a signature it will probably take three days to clear. In comparison, PIN transactions usually clear immediately or within 24 hours. This means that whenever you make a debit card transaction it’s important to have enough money in your checking account to cover it.
When you use a credit card it’s different. The merchant doesn’t get the money from you. It gets it from the credit card issuer. You then agree to repay the credit card company. In general, credit card purchases don’t post to your account immediately. However, if you’re close to your credit limit and make too many purchases within a short amount of time you may be charged additional fees and your interest rate may be raised.
Debit vs. credit cards — protection and security
While both debit and credit cards offer security and protection the way they do it is different. In the event you lose a credit card or it’s stolen and you immediately notify the credit card issuer you won’t be responsible for any unauthorized charges that had been posted to your account. In a worst-case scenario you might be charged $50.
If you lose a debit card or have it stolen, you must notify the card issuer within two days of when you discovered the unauthorized charges. This will limit your liability to $50. However, if you don’t report those charges until between two and 60 days then your liability may increase to $500. And after 60 days it could become limitless.
The benefits of credit cards
Credit cards offer a host of benefits and in the opinions of many people they outweigh those of debit cards. For example, they offer great consumer protections. As you just read, if you lose your card or it’s stolen you’re only responsible for the first $50 and many credit card issuers will even waive that. Also, if you dispute charges with your credit card issuer your funds won’t be tied up until the dispute has been resolved.
Second, credit cards generally come with great rewards including airline frequent flyer miles, travel rewards, credit card points, cash back, hotel rewards and even more. These are benefits you will never get with a debit card.
Assuming you use your credit cards sensibly this will help you establish or improve your credit score. Some credit cards offer extended warranties on select purchases and you can always use a credit card as an emergency source of funds.
The benefits of debit cards
Maybe the biggest benefit of a debit card is they now offer better protections then they did in the past. For that matter, many now offer protections similar to those of credit cards. A second important benefit is that because a debit card is tied to your checking account you can’t spend any more money than is in that account. Since you can’t carry a balance on a debit card you will never have to pay interest or worry about that old devil of compounding interest.
A debit card can also give you access to cash. When you make a purchase at many stores you can get cash back. You could actually buy a pack of gum for $1 at a grocery store and get $40 cash back. That’s a lot better than having to pay a $3 ATM fee. It’s also a very easy and convenient way to get money when you’re not close to one of your bank’s ATMs. Plus, credit card cash advances come with seriously awful interest rates like 19% or higher.
The downsides of a debit card
Of course, the biggest downside of using a debit card is the risk of overdrawing your checking account. The smart play here is to get overdraft protection. In some cases, this would be an automatic transfer to your checking account from a line of credit or it might be an automatic transfer from your savings account. However, a risk that’s growing larger almost every day is that someone could get your debit card number and totally drain your checking account. This might not be your fault, either. Think of those data breaches that recently occurred at Home Depot, Target and Kmart that exposed millions of their customers’ credit and debit card numbers. Are you now wondering if your debit or credit card number is at risk. Then check out this video with a list of the top 10 data breaches or company hacks …
The downsides of credit cards
The biggest downside of a credit card is, of course, debt. Those little pieces of plastic make it just too easy to stumble into serious debt. You make one small charge today, another tomorrow, and a couple more next week and before you know it you don’t have enough money to pay off your balance at the end of the month. So you make just the minimum payment and keep on spending. And spending. Before you know it you have a four or five figure balance and no way to pay it off.
When it’s best to use a debit card
It’s best to use a debit card if your bank offers fraud and return protections similar to credit cards. It’s also good to use a debit card when you need to get cash back and if your bank doesn’t charge any debit card fees. Finally, using a debit card can be a good choice if you have bad credit or if you’re trying to pay down debt.
When it’s best to use a credit card
It may be best to use a credit card if you’re concerned about theft, consumer data breaches or fraud. It’s also good to use a credit card when you can pay your balance in full each month and when you want to earn those juicy rewards such as airline miles, cash back and hotel points. Using a credit card can also be helpful if you’re trying to increase your credit score.
Debit vs. credit cards — which is better?
As you have read, both these types of cards have their up and down sides. However, both of them offer advantages so long as you use them responsibly. The real fact is that it doesn’t matter how you pay for your purchases. The real difference is your spending habits. If you have a budget and live within or below your means both a debit card and credit cards can be your friends.