Credit or Debit
One of the most frequently asked questions when you are at the checkout counter is whether you will be paying with credit or debit. The option to swipe a card at the terminal is available to almost everyone and is much more popular than paying in cash.
Many people are not aware of the differences between the two types of plastic and their answer to the question of credit or debit has become automatic assuming they are basically the same. In order to make the right decision you should know the pros and cons of credit cards versus debit cards.
The key difference is using a credit card the consumer actually borrow money from the credit card issuer. This loan can either be paid in full on your next credit card bill or paid over time with interest.
You spend your own money when you use a debit card. Payment is made directly from your bank account as the transaction is processed. The debit card ensures that you will not accumulate debt and there are no additional bills to worry about. You need to keep accurate records when dealing with debit cards, because if you overdraw your account you may be charged an insufficient funds fee that is typically around $30 per overdrawn transaction.
Credit card providers offer additional benefits that do not apply to purchases made with debit cards.
Fraud
If your credit card is lost or stolen you are liable for a maximum of $50 under federal law and many card issuers offer $0 liability. The protection on a debit card is not at the same level and can vary depending on the bank. You need to contact your bank to find out how they protect you against fraudulent use.
Disputes
Credit card issuers are very helpful in disputes with merchant. The reason is not only to provide good customer service, but also out of concern that you may not pay the balance if you have to deal with unjustified charges.
The merchant has already received the payment from your bank account if you pay with a debit card, when it is time to file a dispute. That means you are less likely to win a dispute unless the merchant agrees to settle in your favor.
Credit Score
A good credit score is essential in order to qualify for loans and mortgages. You can improve your score if you apply for a credit card, since the payment history will be reported to major credit bureaus on a monthly basis. It is not possible to build credit history with a debit card, but if you occasionally pay late it can be an advantage not having a credit card, because late payments will make your score go down.
Rewards
Most credit cards include a rewards program that offer cash back, airline miles, or merchandise. This can be a completely free benefit if you always pay your credit card balance in full every month.
Fees
This is where a credit card can end up being more costly compared to a debit card, but if used wisely you can avoid credit card fees altogether. The fees most common for a credit card holder are the late payment fee and cash advance fees. If you use your credit card at an ATM the credit card provider typically charge a 3% transaction fee. This is a good reason to always carry both a credit card and a debit card in your wallet.
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