We live in a fast-paced world where convenience is prized and we have many different ways to pay for this convenience. Credit and debit cards are probably the most common, and there is no clear cut case of which method is best. What works for one person might not work for another so it is very important to have all the facts when choosing, because deciding to use a credit or debit card is more than just a pay now or pay later scenario.
When using most credit cards, money is not taken immediately out of your account. That money is due by the end of the billing cycle, which ranges from 25 to 45 days. You will be billed for all unpaid charges plus interest. If you can’t stand the thought of paying interest, debit cards might be a better option because the money is taken out of your bank account. What’s not so good is that the money will be taken out immediately and if you overdraw you can be hit with hefty fees. That is extremely important to know if you have automatic drafts or are not keeping track of your spending with your debit card.
Carrying debit cards is a lot safer than walking around with a pocket full of cash, but they are still subject to fraudulent use, either in the form of ATM withdrawals or purchases. Those activities will affect your account immediately and you can easily remain unaware of this activity long enough to experience a significant loss. While most debit cards do provide a little protection from fraud, the coverage depends upon which bank you use, which state you live in, and how quickly you report the loss of the card. There are some banks that offer a zero liability policy for fraudulent use but there is usually a yearly fee for this benefit and also stipulations that the fraud is reported within a certain time frame. Credit cards usually provide greater protection from fraud, but it is best to first check with the company that issued the card to find out their policies and fees.
Unlike having too many credit cards, having too many debit cards will not hurt your credit score. With that said, debit cards will not help you build your credit. If you are concerned with establishing credit, a great way to start is with a secured credit card (one where you post a security deposit with the issuing bank, usually at least equal to your credit line). If establishing credit is your goal, the National Foundation for Credit Counseling (www.nfcc.org) offers some other good ideas on how to accomplish this.
Rewards, rewards, rewards. More often than not, credit cards offer better rewards than debit cards. Banks have been cutting back and some have eliminated their reward programs for their debit cards. On the flip side, when you are using credit cards at times you can feel like you are not even spending any money, which can easily lead to overspending. Even though credit cards offer better rewards, do not focus on rewards or rely on the convenience of credit cards if it is causing you to overspend.
When making your choice it is important to keep in mind that they are each tools that if not used responsibly can easily damage your financial health. Which one is right for you?
Steve Repak, CFP® Professional Speaker and the Author of Dollars & Uncommon Sense: Basic Training For Your Money www.DollarsAndUncommonSense.com
