When to Use Credit Cards, When to Use Debit: What You Should Know

Credit cards were first made available in the US in the 1950s, with debit cards following in the mid-1970s. By 2006, nearly a billion bank-issued Visa and MasterCard credit and debit cards were issued in the United States alone. But while the debit card a

Credit cards were first made available in the US in the  1950s, with debit cards following in the mid-1970s.  By 2006, nearly a billion bank-issued Visa and MasterCard credit and debit cards were issued in the United States alone.

But while the debit card and credit card appear similar, these instruments differ in the way they operate and the kinds of services they provide.

Debit Cards:

Debit cards are linked directly to your bank account so the money you spend is automatically deducted from your account.

Essentially, the debit card is just a simplified way of accessing your bank account from anywhere, anytime--and especially handy if you do a lot of shopping online.  Alternatively referred to as an ATM card, using a debit card to pay for your purchases means that you are allowing the vendor to electronically transfer a certain amount of cash from your personal bank account to his account.

A practical tool for budgeting, a debit card's monthly statement provides a good overview of how much you spend per month, and where it’s going.  Unlike credit cards, your bank balance goes down with each debit card transaction, so you’re less likely to overspend.  (While many banks offer “overdraft protection” that allows you to exceed your balance, you end up paying interest and often extra fees on the money you borrow from your overdraft account.)  But when using your debit card, a consumer should never forget that each time you use it, you expose your checking account to the general public.

Essentially, your checking account holds a liquid flow of cash. By using a debit card, you expose that cash to outsiders.  Any retailer can mistakenly--or intentionally--pull too much money from your account, meaning you‘ll have to suffer the consequences--at least for a while. Furthermore, if your PIN should get into the wrong hands, a scammer can create a fake card, use your PIN at an ATM, and walk away with your cash--virtually untraceable.  Again, you may get your money back through the fraud filing process--but, you may not.

Credit Cards:

Credit cards allow you to spend more money than you actually have, permitting you to borrow someone else’s money (the credit card issuer’s) to make a purchase which you agree to pay the money back later.

Used conscientiously, credit cards can offer many advantages debit cards do not.  For example, if you pay off your existing balance within the billing period, which is generally 15 to 45 days, you can avoid paying any interest on it.  Credit cards also help to build your overall credit rating, as long as you pay your bills on time.  Additionally, some credit card companies offer rewards that you can use to get gifts, cash back or discounts for products, services and special events.

One useful feature credit cards have that most debit cards do not, is that they provide more protection if someone steals your card or bank information.  If you notice a fraudulent charge on your credit card account, you can file a dispute claim so that the charges will be removed from your balance.  Federal law protects you if you need to dispute charges on a credit card, but not if you use a debit card.  If thieves steal your debit card information, it may take weeks for the bank to investigate your claim and replace the lost funds.  In this case, you may have to deal with a dwindling bank balance or bounced checks.

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In should be noted however, that while credit cards offer certain advantages over debit cards, card issuers can and do raise interest rates after you’ve gotten the card.  And if you choose not to pay off your balance each month, the finance charges can quickly become unmanageable in a relatively short period of time.

Additional Things to Consider:

Using your debit card as you run errands throughout the course of a day can create bounced checks and overdraft costs if spending is not closely monitored.  Even a $10 lunch can accrue a $40 overdraft charge.  In this case, why not just use a credit card?  Even a $60 annual overdraft fee on your credit card is a small price to pay for knowing you won't bounce checks and start a chain reaction of overdraft fees.

In most situations, a place of business will not know whether you're swiping a debit card or a credit card. However, some companies, car rental companies, for example, won't treat the two the same way and have been known to demand a credit card--denying the debit card. Their argument is that a credit card implies a minimum level of credit worthiness and financial responsibility.

A common reason for choosing a debit card over a credit card is that you're spending money you actually have and avoiding interest charges from the credit card company.  In cases where you do have enough money for your purchase, however, why not use a credit card and get a 30 day interest free loan?  If you don't carry a balance on your credit card you can generally pay off all your purchases each month without paying interest. Thus, your cash can be kept in a savings account, earning a high-yield interest rate.

References:

http://www.nytimes.com/2009/01/06/your-money/credit-and-debit-cards/primercards.html

Justin Pritchard @ http://banking.about.com/od/checkingaccounts/p/debitvscredit.htm

http://www.themoneytimes.com/featured/20100928/debit-card-vs-credit-card-id-10129929.html

Images via Wikipedia.com except where noted otherwise

Thumb via: http://andrewchia.com/wp-content/uploads/2009/06/Credit-cards.jpg

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