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Debit Cards or Credit Cards - Which are Better to Use?

At first glance you might think that the typical fees associated with credit cards would mean that it is always better to use a debit card for everyday purchases. But in reality, debit cards and credit cards function differently and there can be advantages and disadvantages with both forms of credit.

The most obvious difference is that when you use your debit card, the total purchase price is automatically deducted from your checking or savings account. When you make a purchase with a credit card, you are basically accessing a line of credit from whichever financial institution issued your card. Each purchase that you make is essentially a loan that you must pay back at a later time.

Debit Cards

There are two ways to use most debit cards: "debit" or "credit". Retail merchants many times will ask which option you prefer. If you choose the debit option, you will need to use your PIN (personal identification number) to complete your purchase transaction. The debit option is a good one to select if you want to get cash back with a purchase or want to withdraw cash funds from an ATM.

If you decide to use the credit option for a debit card purchase, you will sign a receipt just like you would with a regular credit card. But unlike a credit card purchase, the total amount of the transaction is immediately deducted from your bank account. The credit option does not work like a loan. You might want to consider using this option for your purchases because it may give you extra fraud protection and the ability to earn rewards. The credit option is also a good choice at retail outlets which do not allow the cash-back feature with purchases.

Merchants generally have to pay a higher fee for credit transactions and therefore may prefer to run your purchase as a debit charge. To avoid losing out on possible fraud protection and debit card rewards, simply tell the salesperson that you want your purchase to be run as a "credit" sale.

Debit cards come with some distinct advantages. A big one is convenience. Using a debit card means you don't have to carry around large sums of cash. You also don't have to go through the hassle of writing a check for purchases (many retail establishments will not even accept a check as payment). Additionally, many "cash-only" merchants now accept debit card payments. Another great benefit of using a debit card is you never have to pay interest charges on your purchases. This can add up to significant savings over time.

There are several drawbacks to using a debit card which you should be aware of. These include:
  • Security - Since the amount of your debit card purchase is automatically deducted from your bank account at the time of the sale, fraud protection may be limited.
  • Overdraft fees - It's very easy for debit card purchases to add up quickly especially if you use your card frequently. A coffee here, a lunch there, a tank of gas... it's important to keep a close eye on your bank account so that you are always aware of how much money is available. It's a pretty safe bet that you don't want to be charged a $40 overdraft fee because you purchased a $5 latte and overdrew your account.
  • Caution - You should protect your debit card (and your PIN) as carefully as you would cash. Call your bank immediately if your card is lost or stolen to prevent unauthorized use of your card (either by illegal purchases or ATM withdrawals).

Credit Cards

When you use a credit card for a purchase you only have one choice - the "credit" option. This means you have to pay back the amount of the purchase at a later date. Credit cards do offer some nice conveniences such as:
  • Rewards - Many financial institutions offer credit cards with rewards programs which allow customers to earn reward points with their credit card purchases.
  • Financial flexibility - You can make a large purchase and have the freedom to pay it off over time, in payments which fit comfortably within your budget. You can also access emergency funds in the form of a cash advance or consolidate several smaller debts into one.
  • Security - If you are shopping online, credit cards have much stricter limits to fraud liability. Many credit cards also offer extended warranty protection and purchase protection on items that you buy. These features apply to purchases made either online or off.
  • Build credit history - One of the most effective ways to build a solid credit history is by the responsible use of credit cards. Studies have found that consumers who don't own a credit card generally have lower credit scores than those individuals who own at least one. Debit cards have virtually no impact on your credit score.
  • Book hotels and rent cars - It can be very difficult to rent a car without a credit card. Because a debit card is linked to a checking or savings account, a rental car company has no way to guarantee that the money you owe at the end of your car rental agreement will be available for payment. The same holds true for many hotel establishments.

It will probably come as no surprise that one of the most troubling aspects of using credit cards is overspending. The smartest and most financially-sound way to use a credit card is to manage it as if it were a debit card. This means being extremely conscious of what you are spending and paying off the entire balance in full each month. Any time you maintain a balance on your credit card account you will be charged interest fees. Over time, these charges can add up to a hefty amount.

The Last Word

The decision whether to use a credit card or debit card for purchases is a personal one. Many people have found that they can successfully use a combination of the two. But no matter which card you select when you make a purchase, you should always keep track of your transactions and maintain a watchful eye on what you are spending. With the availability of online banking and apps that can be used on your smart phone, you can have almost immediate access to your financial accounts. These features make it easy to see your purchases and note your balances.