“Debit or credit?” It’s a question we are all asked each time we step up to a cash register with our purchases. Credit cards and debit cards may be used interchangeably, but there are many very real differences between the two types of card. With a growing awareness of indebtedness, debit cards are rising in popularity thanks to their ease of us, lack of fees, and the fact that they are linked directly to a bank account, making overspending more difficult. However, credit cards, for all their faults, have their distinct benefits too, especially for those who are able to manage their spending habits well. So if the choice arises between purchasing with a credit or debit card, which should you choose? Let’s start with credit cards and examine the differences, pros and cons.
Credit Cards
Credit cards have been around since the 1950′s. Using a credit card is simple, convenient, and secure. There are advantages to using a credit card over a debit card, but there are also some disadvantages.
Advantages of Using a Credit Card
- Protection against theft and poor or undelivered merchandise. You can file a dispute claim if you see a fraudulent charge on your credit card statement, and the company will normally remove the fraudulent charge from your balance. Should you have a dispute with a charge for an unsatisfactory or undelivered item, that charge is removed from your balance until the dispute is resolved.
- Easy payments for big-ticket items. Many people use a credit card for major purchases for this reason alone. Some people may not have the funds to pay for a large item in full when it is needed. A credit card makes the purchase easier to handle with smaller payments.
- Great rewards for credit card use. Rewards such as cash back, gifts, and discounts for certain products, services, or special events make using a credit card more tempting. These perks can make it beneficial for some to use a credit card strategically for their purchases.
Disadvantages of Using a Credit Card
- Increases mindless spending. If you do not pay the full amount owed within the 15 to 45 billing period, interest is automatically added to the purchase amount. Not paying down outstanding debt, coupled with frequent usage of the card, is exactly how consumers end up in high dollar credit card debt.
- Hidden fees. There is a whole range of these. Here are a few examples:
- Redemption fees if you decide to take advantage of the “free” rewards.
- Activity (or inactivity) fees to encourage you to spend more, and more often.
- Payment protection fees to cover minimum payments if you experience a financial hardship.
- International transaction fees charged on purchases involving a foreign bank.
- Paper statement fees for printing and mailing credit card statements each month.
- High interest rates. Some credit cards can have an interest rate as high as 25% or 30%, making your convenient purchase much more expensive in the long run.
Debit Cards
Now let’s talk about debit cards. Debit cards were first introduced in the mid-1970′s and are linked to your bank account. This offers advantages and disadvantages also.
Advantages of Using a Debit Card
- Funds automatically withdrawn from your bank account. The fact that money comes straight out of your bank account when you buy something with your debit card really curbs overspending. Using a debit card helps keep track of where a your money goes and helps with budgeting so you tend to only spend what you have in your account, and no more.
- No hidden fees. The only amounts deducted from your account are the purchases you make, so you aren’t charged for the privilege of charging it to your card!
- No interest charges. Since the purchase price is immediately deducted from your account, no interest is charged at all, ever. There are no bills to come out each month for using a debit card either, so you can’t get caught out with late payments that would damage your credit rating.
Disadvantages of Using a Debit Card
- Limited protection against theft or poor merchandise. Once the money is gone, there is little recourse if your debit card is stolen or if the merchandise you receive is unsatisfactory. It can take weeks for your bank to resolve an issue regarding an unauthorized debit from your account, all while you are experiencing bounced checks and overdraft fees. Visa debit cards do offer a similar level of cover as Visa credit cards, but you need to check that with your bank first.
- Low daily spending limit. As money comes straight out of your bank account, banks tend to place daily spending limits on your card as a security feature. However, this also means you could struggle to make major purchases with a debit card. Even calling your bank beforehand to temporarily lift the daily spending limit can be unreliable, which isn’t ideal.
- “Blocking”. When you use a debit card, retailers can “block off” more than the cost of the transaction to ensure any extra costs incurred will be available. For example, when you pay at the pump for gas using a debit card, an extra $25 or more can be held back, since it is unknown in the beginning how much fuel you will pump. This extra money doesn’t go to the retailer, but it may take a few days for it to be released for your use. This doesn’t happen with every type of transaction, but it’s a possibility consumers should be aware of.
One common practice when considering which card to use is to choose the debit card for smaller purchases and monthly bills, and to have a credit card for major purchases and emergencies only.
So, debit or credit? Which is right for your spending habits? Tom Becker works at Money Choices, where Aussies can compare interest rates and read thorough reviews of financial products.