If you are able to keep your expenses in check and use credit cards wisely, paying for your daily expenses with credit or debit cards is a no-brainer. Using plastic can greatly facilitate budgeting, since sites like Mint.com can automatically track your purchases, and you can also avoid unsafely carrying large sums of money for regular purchases like groceries, gas, or entertainment.
Eventually a cashier will ask, “Will that be credit or debit?” What goes through your mind when you decide? Do you simply brush it off because it doesn’t matter to you? Do you think about whether one of the options will actually save you more money, or how your financial security will be affected by your choice?
If you’re tracking expenses, spending less than you make with a budget, and saving for the future, but have been functioning on a cash-based budget, it may be time to start paying for your day-to-day expenses with a credit or debit card. This can make budgeting much easier and can also make you eligible for rewards programs through your card company.
Credit and debit cards both come with their perks and drawbacks for you to consider.
Benefits of Debit Cards
While some debit cards may allow an accidental overdraft and charge you a fee, it’s impossible to significantly overspend your account with a debit card. With a credit card, you can lose track of your spending and go overboard. With most debit cards, however, if you try to spend more than you have in your account, the purchase simply won’t go through.
Built-in limits mean that if the money isn’t in your account, you can’t spend it. As debit cards become even more popular, some banks will let you choose whether or not you’ll be allowed to make the occasional overdraft or if you want the protection of never being allowed to go beyond your monthly income.
2. Generally Low (or No) Fees
Many banks offer debit cards for free, and as long as you don’t break the terms of the card holder agreement, like minimum balances, you won’t face any fees.
At retail stores that allow it, most debit cards give you a chance to add a cash back charge to your purchase so you can get cash from your account from a cashier. It’s more of a convenience than anything else, but it can save time and ATM fees in the long run.
3. Rewards or Automatic Savings Programs
Because of increased competition from no-fee credit cards, debit card companies and banks have been stepping up their rewards programs. Some even offer programs that help you save money in small increments over time, which means your daily spending can benefit your savings account.
4. Protection from Fraudulent Use
Debit cards offer much more protection from theft than cash does. First, it lessens the need for you to carry cash in your wallet. This is an obvious advantage.
Next, some would say that using a debit card is more secure than using a credit card. Inputting your PIN virtually verifies the purchase for the retailer, and makes it very difficult for identity thieves to use your card.
Finally, if you do lose your wallet or are a victim of identity theft, debit cards add a level of security and an ability to track the expenditures of the perpetrators. Hopefully your bank can help recover your card and assist the authorities in catching criminals.
5. Limited Liability from Theft
Further, on top of the ability to track fraudulent use, debit cards limit your liability from theft or robbery, as most cards have a limit on the amount the card holder is responsible for in this type of circumstance.
6. No Interest
Since you can’t carry a balance, you’ll never pay interest on debit card purchases. In fact, some banks like ING Direct and PerkStreet Financial offer debit cards that earn 1% to 2% cash back on your purchases.
Drawbacks of Debit Cards
1. Overdraft Fees
If you choose the option to have permission to overdraw your account in an emergency, then when you spend beyond your balance you’ll be on the hook for a hefty amount of money. For example, if you’re out of gas a day before payday and you put $10 worth of gas in your car, but your account can’t cover the cost, your bank is going to charge you a penalty.
Worse, they may put a “hold” on your account. This hold can be for an amount that far exceeds the ten bucks you used to put gas in your tank. If you don’t have a lot of money in that account, the overdraft bank fees probably won’t be as bad as extended credit card debt, but they’ll be a burden nonetheless.
2. Watching Your Balance
If you use your debit card, you always need to be sure of the available spending limit that you have. You’ll need to take responsibility for manually monitoring this number.
To prevent expensive overdraft charges, you’ll have to take the time to check up on your account balances to avoid overdrawing the account. Your bank isn’t going to do it for you.
3. Reduced Rewards
In most cases, rewards on debit cards aren’t as valuable as those on comparable credit cards. Credit card companies are much more profitable than their debit counterparts. This means that debit rewards are normally significantly less valuable than credit cards, and it will take longer to earn them.
4. No Credit Score Help
Debit cards don’t help you build your credit history, because they’re a form of cash payment, not a credit instrument.
5. Less Protection
Carrying a debit card is safer than carrying cash, but debit cards don’t carry the same fraud protection that credit cards do. Generally, your bank has a limit on the amount of protection that they will offer you in a fraud case. In some circumstances, even though you are protected, you could be on the hook for hundreds before the protection kicks in.
For instance, if you pay for something with a debit card online and the company goes bust before you get your product, you probably won’t be able to recover your cash. On the other hand, a credit card company would be able to refund your money. Credit cards have built-in protection programs to shield you from these instances; debits cards, for the most part, do not.
Similarly, if a dispute arises between you and a vendor, you have dispute rights if you paid with a credit card. These rights basically don’t exist with debit cards and you’ll need to respond quickly to unauthorized transactions in your bank account.
6. Other Security Issues
Personally, I think that debit cards are unsafe. I do not feel comfortable entering my PIN in any public place. If someone sees me entering this code and can later somehow get access to my account number, then I have just opened myself up to all kinds of fraud opportunities.
Additionally, many debit card machines are simply unsafe to use. Criminals have hacked into these machines in the past to access personal banking information. If you frequently use your debit card, pay close attention to bank ATM machine skimmer hacks and fraud.
Benefits of Credit Cards
1. Escaping Fees and Interest
Many credit cards don’t have annual fees, and if you pay the balance in full on a monthly basis, you will not incur interest or penalties. This means you get all the advantages of credit card use without paying for them, as long as you keep your spending within your means.
2. Robust Rewards
Talk about getting something for nothing! When used wisely, credit cards offer amazing rewards programs, like travel rewards for bonus airline miles and cash back on purchases. If you charge all of your purchases and pay your balance in full, then those rewards will add up very quickly. Before you know it, you could be getting a chunk of cash back or a free flight, at no cost.
It’s up to you to pick the best for your needs. Some of my favorites are:
3. Automatic Payments
Companies, from utilities to subscriptions services, usually allow you to set up recurring payments from a credit account. This is a great way to make sure you never miss a payment. You also don’t need to monitor the everyday account balance on your card to keep from overdrafting, like you would with a debit card. This makes it much easier to set up recurring payments without the threat of overspending.
4. Ultimate Fraud Protection
You will have more protection if you use a credit card than if you pay for something with your debit card. Most credit cards offer 100% protection from fraud or theft. If you’re the victim of identity theft or credit card fraud, you won’t be liable for the fraudulent charges.
For example, if you’re ever overcharged, if an item you ordered never arrives, or if you pay for services that are never rendered, you always have the option to dispute that particular charge (by using a credit card chargeback) with your credit card company.
Also, if there is an error on your credit card statement, you can often fix it without taking on any added expenses. While a debit card immediately takes the funds out of your account, cutting you off from your cash, a credit card delays the transaction in a way, buying you time to dispute a charge and rectify possible fees before you have to pay them.
5. Building Credit
Your credit score is extremely important, and your judicious use of a credit card can help you build up your score. In fact, responsible use can mean that you get the best rates on a loan for a large purchase, which could save you thousands of dollars down the road. Using a credit card for daily expenses and paying it in full on a monthly basis is a great way to build up your positive credit history.
6. Extended Warranties
Most credit cards offer additional extended warranties on the items you purchase - on top of any standard manufacturer’s warranty. This could come in handy if an item you buy with a credit card breaks after the standard warranty expires.
Drawbacks of Credit Cards
We’ve all heard the stories. If you let your credit card spending get out of hand, you can easily find yourself firmly entrenched in debt. If you can’t keep your spending in check, you can easily end up paying interest, costing you a great deal of money over time.
Impulse buying is more prevalent with credit cards because you have a large amount of credit at your disposal. Most people tend to overspend when using a credit card. With debit cards, you can basically only spend what you have in your account.
2. Annual and Hidden Fees
Some cards come with annual fees, and you still may find some hidden fees. It’s tough to avoid new and old types of credit card fees including late fees, over-limit fees, balance transfer fees, and card replacement fees.
If you’re choosing a rewards card or an exclusive credit card, pay close attention to the associated costs. Remember, it’s not just the annual fee. You need to look out for fees that come with accessing your rewards too. Airline rewards, for example, can come with charges and limitations that affect your bottom line.
3. Credit Trouble
If you miss a payment, your credit will suffer. Paying your card late or missing a payment is the worst thing you can do. Not only will your score suffer, but you’ll also end up paying interest and penalties.
Additionally, if you ever go over your limit, your credit score could take an immediate hit. Same thing if you pay a bill late. These are all things that can hurt your credit score.
4. Limited Acceptance
While carrying a credit card is safer than carrying cash, it does come with limitations. Even today, some restaurants and stores are still cash only. Some stores only accept certain cards in an effort to keep their own costs down. Unlike debit cards, you normally can’t take your credit card to an ATM and withdraw cash without paying high cash advance interest rates.
Yes, there are security issues, even with well-protected credit cards. Believe it or not, some businesses still print receipts with your full account number on it. Also, keep in mind that quite often, paper copies of these receipts are stored in-house at a lot of retail businesses. This could open you up to identity theft opportunities from the employees of these businesses. Check your receipts to make sure your full number isn’t on there and watch out for other credit card scams and fraud as well.
6. Costs to Businesses
What about the cost to the businesses processing these payments? Typically, a debit card transaction only costs the bank about 17 cents to process. A credit card transaction, meanwhile, can cost as much as $1.50 per transaction. Should this matter to you? Most definitely, because retailers and restaurants pass these costs on to you, the consumer.
The debate over which is safer to use, credit or debit, continues to this day. As you can see, there are a lot of good arguments on both sides. When it comes down to it, it’s a matter for you to decide, perhaps even on a case-by-case basis. As much as you want to rack up points and rewards, remember that you don’t have to pick just one card to use exclusively. Choose which benefits are most attractive to you, and which downfalls are more relevant to your personal financial situation. You can choose which type of card you want to use for specific purchases or at certain stores.
Which do you prefer, credit or debit, and why?
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