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Debit or Credit - Does it Matter?
As credit card popularity rises and debit cards continue to replace paper checks, consumers are asking whether there's a difference between the two. And is one better than the other?
It depends on your needs, the way you manage your finances on a monthly basis, and your philosophy on debt. The following outlines the major points of differentiation between debit cards and credit cards:
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DEBIT CARDS |
CREDIT CARDS |
| Convenience |
Can be used at ATMs for cash and at retail outlets that take your brand -- e.g., MasterCard or VISA; you can also get cash back on purchases at most places. |
Same as debit cards (if you have a PIN for ATMs), but no cash-back option at retail outlets. |
| Payment |
Issued by banks, debit cards take funds directly from the money in your bank account - acting much like a check, just faster. Even if you sign for your purchase and call it "credit," the money still comes directly from your checking account. |
Issued by credit card companies, credit cards require monthly payments and act like a revolving line of credit (you are actually borrowing the money and paying interest on the unpaid balance). |
| PIN or Signature |
Offers the option of using a required PIN number or signing your receipt. |
Requires signature and often a picture ID. |
| Penalty Potential |
Failure to keep track of expenditures could result in overdrafts of your account. One overdraft typically costs $30-40 in penalties. |
If credit card balances are not paid in full each month, you pay interest on what you owe but are not usually assessed penalties unless you fail to make the minimum payment (late payment fees are typically around $30). |
| Solving Merchandise Problems |
If there is a problem with a purchase (damaged order, etc), you may have to deal directly with the merchant. |
Credit card companies usually will act on behalf of a consumer who files a prompt complaint. |
| Liability if Lost or Stolen |
If you report your missing debit card within two days, you're only liable for $50 of unauthorized charges. If you report it within 60 days, you're liable for up to $500 in charges. After that, you could be liable for the whole amount charged on your debit card. |
Credit cards offer better protection, with a $50 cap on losses -- even on charges discovered after 60 days. Many cards now have zero liability policies. |
If you choose to use a debit card, don't forget to record the transaction in your checkbook register; if you use credit, take care not to let your credit card debt put you in a financial bind.
Whether you choose to carry a credit card or debit card, protect it as you would cash. One of the best things you can do is to check your bank or credit card account online every day, and scrutinize your monthly statements closely looking for unauthorized charges.
If you ever suspect fraud, act fast. The Federal Trade Commission (www.ftc.gov) offers an excellent resource that can help you respond quickly in case your wallet or purse is stolen.
Questions? Contact your Pinnacle financial advisor.
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