Fantastic Plastic? Credit Vs. Debit

  • "Credit cards beat debit cards"

    "This may be sacrilegious to say, as a personal finance blogger, but I’ve never been a fan of debit cards," wrote Jim Wang on his site earlier this year. The popular writer at Bargaineering.com gave his readers eight reasons to stick with credit cards instead of using debit cards linked to a checking account. Here we react to his reasons, and include a few more recent examples from Jim. Photo Credit: shawnzlea
    Reason 1: "Finger miskeys"
  • Reason 1: "Finger miskeys"

    "Since a debit transaction immediately reduces your account balance, a cashier mis-keying in your purchase can have a devastating effect on your finances. It’s not unheard of for a cashier to key in $495.00 instead of $4.95 when they’re under pressure, tired or stressed. When that happens, it can take days to unravel and by then you could have checks bouncing, your cashflow gone, etc. On credit, it’s not a big deal to reverse a charge temporarily," Wang wrote. OUR TAKE: This is a terrifying possibility. Luckily I've never had that happen to me, but sometimes merchants place a large authorization on your card. If you have a small balance, it can seriously wreck your finances for a few days. I remember once a high-end lounge/bar in the city put a $150 authorization hold on my card. I thought the bartender had simply ripped me off, but the authorization went away after a few days. Photo Credit: aarongustafson
    Reason 2: "Blocking"
  • Reason 2: "Blocking"

    "When you fuel up at a gas station with a debit card, the station will put a block of $50 on your card, even if you put in $5. It’s because they don’t know how much gas you’ll be buying so they have to lock up the maximum amount." OUR TAKE: Yep, this is a real issue with debit cards. As mentioned in the previous slide, some bars and lounges also do blocking nowadays. It's usually no problem with a credit card, but with a debit card it can overdraw you. Photo Credit: cmcgphotography
    Reason 3: "Renting a car on debit can cause headaches"
  • Reason 3: "Renting a car on debit can cause headaches"

    "Renting a car with a debit card can be a huge hassle and the same blocking issue happens, except on a much larger scale. Instead of $50, think $500 and the release is often a week after you return the car." OUR TAKE: Yikes! A temporary $500 hold is no big deal on a credit card with a $2,500 or $5,000 credit line, but it's a very big deal if for a week (or more) $500 of your checking account funds are tied up. Photo Credit: kathika
    Reason 4: "Overdrafting is still possible (and expensive)"
  • Reason 4: "Overdrafting is still possible (and expensive)"

    "A big argument for debit is that it helps you manage your spending, you can’t spend more than you earn right? Well many debit cards now let you spend more than you have in the account and hit you with an overdraft fee." OUR TAKE: Not just one overdraft fee. Since banks process debit transactions in batches, you could be hit for five or more $35 overdraft fees in a single day. This happened to me once while I was broke and in college. It wasn't pretty. Photo Credit: paalia
    Reason 5: "Slightly weaker fraud protections"
  • Reason 5: "Slightly weaker fraud protections"

    "Credit cards offer very good fraud protections whereas debit cards offer a slightly weaker set of protections. For example, you are only liable for $50 of credit card fraud if you discover the loss/theft of a card after the fraud occurs. With a debit card, if the loss of the card is reported within 2 business days, it’s only $50. After 2 business days, it’s $500. After 60, you are completely liable." OUR TAKE: Credit card companies have a financial incentive to get fraud handled quickly... after all, it's their money that is exposed. With a debit card, it's your money on the line. Plus, if a credit card is exposed to fraudulent activity, you can simply cancel the card and have them issue you a new number. Or you can close the account and just use another card. Freezing a checking account, on the other hand, creates a number of problems... you may not have access to your money, for one. Photo Credit: wheatfields
    Reason 6: "Most debit cards don't offer rewards"
  • Reason 6: "Most debit cards don't offer rewards"

    "Some debit cards do offer rewards but the vast majority don’t, since debit card transactions are usually very cheap (think a flat fee of 15 cents). With the fees so low, there’s no room for rewards." OUR TAKE: Exactly. Credit card companies take a nice interchange fee every time you use their card at a merchant that accepts them. Part of this fee can be used by the company to finance reward programs, cash back incentives, and so on. Debit cards generally don't offer exciting reward programs since the issuing bank doesn't make much on each transaction. Photo Credit: tao_zhyn
    Reason 7: "You don't build credit"
  • Reason 7: "You don't build credit"

    "This is a pretty obvious negative about debit cards and might not be something you care about if you swear off credit as a whole (though there are several ways a bad credit score can hurt you outside of borrowing money)." OUR TAKE: Unless you subscribe to the Dave Ramsey school of thought that credit cards have no upside, you should use a card regularly to build your credit history. Just make sure you pay on time, every time. If you treat a credit card as a "charge card" and pay off your balance in full each month, you will avoid interest altogether and still reap the benefits of the card's reward program. Photo Credit: TheTruthAbout...
    Reason 8: "Warranty benefits"
  • Reason 8: "Warranty benefits"

    "When you purchase something on a credit card, the credit card company often gives you a warranty benefit that doubles the existing manufacturer’s warranty up to a year. Debit cards don’t usually offer this." OUR TAKE: Definitely a plus. American Express (Stock Quote: AXP) is especially good about this. Photo Credit: acosand
    Reason 9: "Emergencies"
  • Reason 9: "Emergencies"

    "With debit, you're limited to the amount in your bank account. With credit, you are limited by the line of credit the company has extended to you. This is most significant in emergencies. If there's an emergency and you need access to money quickly, you may be out of luck because your bank account balance is lower than what you need to fix the emergency. With a credit card, you can leverage the credit line in the short term and sort out the mess later." OUR TAKE: Credit cards can be an emergency lifeline, but don't fall into the trap of putting a large expense on a card and then paying it off over time. Ideally, you should work on an "emergency fund" savings account so you don't ever need to rely on credit cards when something goes wrong. Of course, we don't live in an ideal world, and sometimes a credit card can provide the short-term cash infusion needed to fix your car's engine or pay for an emergency flight to see a sick relative. Photo Credit: gwire
    Reason 10: "Better categorization features"
  • Reason 10: "Better categorization features"

    "Credit cards generally have better categorization features on purchases. They've had a lot more time to develop additional features to the card, as compared to debit cards. For example, on restaurant purchases some of my cards will break out how much is on the bill and how much is on the tip. Since they have rewards, they categorize purchases so it can help with budgeting." OUR TAKE: Fancy account overviews and useful statistics are always nice. Some online checking account overviews provide a decent amount of information, but just as many are uninspired spreadsheets. Photo Credit: kevinzhengli
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