Debit or Credit Card - What Is Right for You?
Pros and cons of using debit cards and credit cards, with tips from Frank Abagnale.
When using an automated checkout, you’re usually given an option of different payment methods: cash, debit card, credit card – even checks can be processed by today’s checkout terminals. Knowing the difference between the various types of transactions may help you decide which option is best for you.
When using a credit card, the transaction is added to your card balance and you make a payment on the card each month.
If you opt to use a debit card, you’re usually given the option of either entering your personal identification number (PIN) or making it a signature-based transaction. If you choose to enter your PIN, the money is moved directly from your checking account at the time of purchase. If you want to get cash back, this is a good option.
Alternatively, you can choose the “credit card” button on the checkout terminal and put in your signature instead of your PIN. This transaction may take longer to post to your checking account because it’s processed through the credit card network. This type of transaction offers the same liability protection as using a credit card, but the funds are withdrawn from your checking account instead of being added to your credit card balance.
Pros and cons of using credit cards
There are numerous advantages to consider when using a credit card. Here are some to consider when deciding whether to use your credit or debit card as payment:
* Using a credit card and creating a solid credit history may improve your credit rating. Using a debit card has no impact on your credit report.
* If you use a debit card to make online purchases, what can you do if the item arrives broken, or doesn’t arrive at all? The Electronic Funds Transfer Act, or EFTA, doesn’t require banks to intervene on your behalf in these cases. The money has been removed from your account and you’re stuck trying to get someone to authorize a return. Using a credit card places much of the transaction risk squarely on the credit card issuer, according to the Fair Credit Billing Act. This federal law protects you against credit card fraud, limiting the amount you have to pay to $50. 1
* The Fair Credit Billing Act also allows you to dispute charges. If you order online and the item doesn’t arrive, you can file a dispute claim with the credit card issuer. The retailer won’t receive payment until the dispute is resolved.
* Using a credit card may offer more protection if the card is lost or stolen, because if someone steals your debit card (or your debit card number), your entire bank account is at risk. You’ll probably be able to get your money back eventually, but consider the hassle of overdraft fees, bounced checks, etc.
* Many credit cards also offer rewards for use – airline miles, cash back, special bonuses and other incentives that can add up to a nice, low-cost vacation.2
For some people, using a credit card to make purchases is better than using a debit card. However, money experts advise that putting it on plastic is a temptation for many to spend more than they have, and it doesn’t take long for these free-spenders to find themselves deep in debt.
Another drawback to using a credit card? Often, interest on credit card debt is at a high percentage, especially if the borrower’s credit score isn’t high enough for them to qualify for a low-interest card. So, if you’re not able to pay your balance in full each month, fees may mount up. There are also fees to be paid when transferring a credit balance from one card to another or taking a cash advance, and late fees for late monthly payments. In other words, a credit card may cost more in interest and fees than a debit card, so if money is tight, consider using your debit card to lower your monthly credit card expenses.
Good Advice from a Fraud Expert
Fraud expert and author of Catch Me If You Can, Frank Abagnale, offers the following recommendations on whether to use your debit or credit card.3
* When you use a debit card, ask to sign for your purchase rather than using your PIN. According to Abagnale, this usually provides the same protections you receive using a credit card.
* If you have poor credit, improve it by using a credit card responsibly. Pay down balances, make payments on time, and you just may see an improvement in your credit report, making it easier and less expensive to obtain a much-needed loan, for example.
* Abagnale suggests using a credit card rather than a debit card to make online purchases, since your liability for fraud is limited to $50. This also gives you an ally in the event of a problem. The credit card issuer can put a hold on payment to the retailer until a resolution is reached.
For sound, personal money management, use your credit card to make large purchases and spread payments out over time. However, don’t be tempted to make big purchases simply because your credit line allows it.
If you pay off your credit card balance each month, and keep your spending in check, credit cards offer advantages over debit cards. On the other hand, if your credit cards are maxed out, a debit card may be your best option until you get your credit under control.
The take-away? Consider your payment options during any transaction – from paying for the dry cleaning to buying furniture. How you pay may well make a difference in how much you pay.
2. For information about credit cards from Nevada State Bank, visit www.nsbank.com/creditcards
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.