Credit Card vs Debit Card
Benefits and drawbacks of Debit Cards
Credit cards are great, but make it very easy to spend more money than you can afford, thus increasing debt. To avoid hefty finance charges, it is important to pay off your credit cards in full every month.
Most banks offer a free Debit Card (also known as a Check Card) which only let you spend as much money as you have in your checking account. This helps to prevent debt that you incur when using a credit card. Debit cards are great for someone concerned about spending more than they can afford. Think of debit cards as your wallet. Only that your wallet contains your entire bank account. You cannot spend more than what you have.
Benefits of Debit Cards:
- You cannot spend more money than what you have in your bank account. Hence, it encourages you to be smart about spending.
- The moment you use your debit card, the amount is deducted from your bank account. There are no monthly bills to pay. So, no need to worry about late payments.
Disadvantages of Debit Cards:
As all charges are deducted from your bank account immediately after you use your debit card, disputing charges are more difficult than credit cards. It is more difficult to dispute funds already drained from your checking account, rather than a credit card where nothing is paid while charges are disputed. Some merchants do a "pre-hold" when swiping your card before the charges are made, causing funds temporarily removed from your account. This may not work well for someone with little money in their checking account.
Usually the prehold charge is more than what you have to pay and that may limit your spending bracket on other items. Pre-holds are not as problematic on credit cards, since they only hold funds from available credit and do not hold your real money. Car rental companies, hotel reservations and gas stations usually do the pre-hold amounts of money.
Some credit cards offer additional coverage on purchases, which are not available to Debit Cards. For example, American Express offers free extended warranty coverage on electronics and additional insurance on rental cars. Credit cards with a store's logo usually offer additional discounts at that store, not available to Debit Card customers.
Many credit cards offer cash back on purchases or points that can be redeemed for various things or miles that can be used for free travel.
Using a Debit Card, if you accidentally spend more money than available in your checking account, some banks will charge a hefty overdrawn penalty that is nearly impossible to dispute.
Debit cards don't offer as much protection against fraudulent use as credit cards do. This is especially true if a debit card has been lost and is not been reported in a timely manner. It's important to contact your bank to find out exactly what protection you have and what you are liable for in the event of fraud occurring. The key to protecting yourself when you suspect that your stuff has been stolen is acting fast! The Federal Trade Commission offers an excellent resource that can help you respond quickly in case your wallet or purse is stolen.
One advantage of credit cards is that they are helpful for consumers seeking to build their credit history. Responsible credit card usage can improve one's credit rating, which will improve your chances of obtaining favorable credit terms for car loans, mortgages and other personal loans.
The trick is to use both wisely. In some situations, debit cards are great and in some credit cards is the way to go. Use your debit card for "cash and carry" type of purchases and use your credit card for expensive and sight unseen purchases. Credit cards offer much more protection. For instance, you can contest a credit card charge for a defective product or if the product you bought does not function properly within like 3 months.