The Finance Fiend

Getting Financial Freedom by 35!

Consumer Ed 101: Debit Cards vs Credit Cards April 21, 2009

Filed under: Uncategorized — Rebecca @ 12:05 pm

What is the difference?

If you have a checking account, you will most likely have a debit card.  These might be as basic as an ATM card that you can use with certain stores and vendors and entering you PIN.  A debit card is VISA or Mastercard secured, and allows you to sign your name instead of providing a PIN. They bank will take money immediately from your account with PIN requiring debit, but will usually take a day or so to process transactions run as a ‘credit.’ Your money always comes from funds available in your checking account.  Its pretty much like a faster, and more convenient check.

A credit card is a card that allows you access to a line of credit given to you by a bank.  Every card has its own terms, but you will be given a certain amount of credit and an annual percent interest (APR).  Different options typically have different APRs.  A regular purchase might have a 12% APR while a cash advance is 25%.  Also, many credit cards give a certain amout of time as a ‘grace period’ where they will not charge interest as long as you are in good standing with the company.

So which one is better?

Well, each has its good points.

Debit cards are great for people that have a harder time controlling their spending. While they may be able to swipe the card and go, the money is taken immediately from thier checking account making more of an impact.  This also means that if you have no money in there, your transaction will be denied. That may, or may not be a good thing depending on your spending habits.

One advantage of credit cards is the large amout of federal laws they have to follow.  If you experience credit card fraud, the company is required to investigate if you send a written request within 60 days.  You also only have a $50 liability. That means if someone takes you card and buys $300 worth of gas in a day, you will by law not have to pay more than $50 for the charges.  In my experience, many credit cards will relieve you of all liability to keep you as their valuable customer.

With a debit card, the liability is $50 if you notify your bank within 2 days of noticing the fraudulent charges. After 2 days, the liability is $500, and after 60 days its the balance of the account.  Now obviously if you only keep a couple of hundred dollars in your checking account, you would be better off waiting until the 61st day if you missed the 2 day cutoff.  Some banks do not increase the liability, but its not regulated federally.

In the case of fraud,in general you are more protected using a credit card than a debit card.  Just look into the details of your bank to find out if your bank has a set limit or not.

I have experienced identity theft/fraud twice.  The first time was when I had just moved away from home and lived with my sister.  Her car was broken into and her debit card was stolen on a Friday night.  The bank called Monday morning asking why she had purchased gas 4 times in a town 30 minutes away over the weekend.  She told them her car was broken into, and she had no idea the card was even gone.  The thieves took her debit card and used ‘pay at the pump’ features to fill everyone’s gas tanks.

The second time, was my own experience with a credit card.  I was a student and a while rather foolish, somewhat frugal at the time.  I bought my groceries with my credit card because it was easier, smaller, and I didn’t have to worry about having cash lost or stolen.  Later that week, I recieved a call from my credit card asking about a purchase in Florida. The vendor had actually contacted them to see if it was fraud, and yes it was.

In both cases, neither of us paid anything.  So, while law dictates a $50 max, many banks and credit card will waive fees to keep you happy.

Whats best?

I personally say, why not get both.  I rarely use my debit card.  Not because its harder to use than my credit card, but because it doesn’t have as many perks.  When I first got the debit, I would earn 1% on all ‘credit’ purchases using my debit card.  After a few months the 1% was only for certain vendors, and since I had only earned 28 cents, I figured it wasn’t worth it.  I now primarily use my debit card when I will need cash.  Whether I want cash back at the grocery store or just a 20 from the ATM, there are no higher interest rates for getting cash with a debit card because its your money.

For most purchases I use a credit card.  By using one credit account, it simplifies where the money logs are, making it much easier to track spending and enter all the info into our monthly budget. We also pay the entire balance of the credit card off at the end of the month.  If you have the right bank account, you can actually make money doing this.  If you keep your money in a savings account that earns interest, you can earn a few pennies by using a credit card and paying it off at the end of the month.  I don’t condone that because it can be risky (money didn’t transfer, etc).

Have you had enough of this yet?


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