Many people have credit and debit cards. You probably have more than one of each. They are convenient and offer you some protections that cash doesn’t. However, they are not the same. Personally, while I have been issued debit cards from the banks I accounts with, I don’t use debit cards. I only use credit cards. Here’s why.
They Look Alike, But They’re 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 bank customers to spend money by drawing on funds that they deposited with the card provider. (Usually out of a savings or checking account.) Credit cards allow consumers to borrow money from the card issuer up to a certain limit in order to purchase items or withdraw cash.
Here are some advantages many claim for the different cards:
Advantage: 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 2006 report by TNS Financial Services Consumer Credit Card Program revealed that about three-fifths 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 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 to 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 many of the user benefits offered by credit card companies.
Advantage: Credit Cards
Rewards. Credit card users can reap cash, discounts, travel points and many other perks unavailable to debit card holders by using rewards cards. Smart consumers who can pay off their cards in full and 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. If an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, for example, it’s worth checking 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. As long as the customer reports the loss or theft in a timely manner, his/her maximum liability for purchases made after the card disappeared is $50. The Electronic Funds Transfer Act gives debit card customers the same protection from loss or theft – but only if the customer reports it within 48 hours of discovery. After 48 hours, the customer’s liability rises to $500; after 60 days there is no limit.
Disputing transactions. The Fair Credit Billing Act allows 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 disputed charges; the amount is usually deducted immediately, and restored only if the dispute is withdrawn or settled in the merchant’s favor. 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 for a customer may be allowing the rental agency to put a hold of perhaps a few hundred dollars on his or her bank-account debit card as a form of surety deposit.
The Bottom Line:
The only real advantage I see for debit cards is they can prevent people from running up debt they cannot pay off. Smart shoppers who can control their spending are probably wise to reap the benefits offered by credit cards for the majority of their purchases.
I personally pay everything I can with a credit card that offers rewards in either cash back or airline miles. With the rotating rewards some cards offer (Each quarter some cards offer 5% back on different types of stores), I carry a note in my wallet to remind me of which card to use at different locations to maximize my cash back. I always pay off each credit card in full so I don’t have to every pay interest. I only have one card that has an annual fee, and that is an airline AMX Gold Card that I save more with baggage fees each year by having it than I pay, so I’m still ahead.
If you are disciplined and smart with your cards, you can come out ahead, as well as have more security with your purchases by using the right credit cards.