Debit vs Credit Cards Determining What’s better

Debit and Credit cards are both plastic cards that are used to pay for items instead of using cash or checks. There are two kinds of debit cards. Those which are linked to a customer’s bank account(s) and the prepaid ones, where the owner just loads the amount he or she wishes.

Both debit and credit cards are more convenient to carry than cash and they take away the hassle of writing checks all the time. And with most banks now issuing debit cards which are processed through the MasterCard and Visa networks, both credit and debit cards can be used to make online purchases and bill payments.

It is important to know the difference between the way how debit and credit cards work in order to determine what is better. There are basically two major differences:

Debit card purchases are linked and in most cases, instantly deducted from your bank account, while credit card purchases are taken out of the card-issuing bank, up to the amount of your credit limit. In other words, a credit card is money borrowed with an intention to pay back in the future.

Another difference is the way debit and credit cards are used. With a debit card, you can make a PIN-based transaction (debit), or a signature-based transaction, in which case you select credit as a form of payment. In other words, you can use your debit card as credit (as long the card has MasterCard or Visa on it). On the other hand, you can use a credit card as a debit card.

Both debit and credit cards have their own advantages and disadvantages. Lets take a look:

DEBIT Vs CREDIT CARDS: Advantages and disadvantages:

1. Interest and fees. When you use your credit card to pay in the future, you are definitely entering into an agreement to pay the card issuer in the future. Until this balance is paid for, you continue to incur interest on a daily basis. However, since a debit card purchase deducts money from your own account, you don’t have to pay interest on it. Also, some credit card companies charge annual fees or monthly maintenance fees. Well, not all of them do, so it is important for a customer to find if there are any annual fees associated with the card. On the other hand, almost 90% of the banks don’t charge for their debit cards. The only debit cards that are paid for are the prepaid, which are not linked to any bank account.

2. Risk and security. Because most debit cards can be used as credit, there is a higher degree of risk associated with their use if the card ever gets stolen or is lost. Before you get the chance to report your card as missing, someone could have swept all your funds from your account. Even if the bank investigates the fraud, it could take some time before the funds are returned to your account, if recovered. With credit cards however, you are more protected since they were not your funds in the first place and you may not need to use them right away, anyway. Plus, credit card fraud carries a higher protection in terms of liability than with debit cards (could be better if the debit card was PIN-based but your purchase options would be limited since some merchants are unable to process debit card transactions).

3. Rewards. Most credit card companies are coming up with rewards cards. This means that you get some points for using your card. Even some banks offer rewards if you choose credit and sign your receipt. In this case, a customer will always want to use credit if they are to get such rewards.

4. Debit cards can be used to obtain cash back at a merchant that provides for such. A customer will be required to use their PIN. This avoids the trip of going to the ATM. With a credit card however, you cannot get cash back from any merchant. And when you get a cash advance at an ATM, you must pay a higher rate than for regular cash purchases.

5. Spending limits. Most debit cards have daily spending limits. Although you are allowed to make unlimited daily purchases, there is always a maximum spending limit that you will be subjected to. Therefore, debit cards are not good for larger purchases, as compared to credit cards which can be used up to your credit limit. This spending limit feature may be inconveniencing for those individuals who don’t have any credit cards or have lower credit limits, or who are almost maxed out on their cards. Just imagine not being able to use all your money to buy what you want.

6. Credit cards are a good way to build a credit history. You might have all the money to spend and want to avoid any credit cards, but this may not help you if you ever need to finance an item that is outside your ability to pay with cash, such as a mortgage loan. Your spending and payment history on a credit card is an important factor that most lenders look at it. They want to know that you have some experience using credit before they extend that huge loan to you.

7. Credit cards are also good if you don’t have money right away but plan to pay soon. There is always a grace period associated with new purchases using credit cards (up to 25 days for most banks). If you don’t have money but hope to get it soon, a credit card will come in handy. This is especially useful in emergencies. However, you must be sure you will be able to pay this money back and on time, to avoid the interest payment or future debts.

8. Avoiding debt: Using your debit card instead of credit card sometimes makes you more responsible than using a credit card. A debit card helps you stick to a budget since you won’t spend more than what is available in your account without incurring non-sufficient funds. A debit card is therefore a good way to avoid entering into debt since you may not be able to pay your entire credit card balance on time, thus resorting to minimum monthly payments that take forever.

While the benefits of using a credit card may seem to help mitigate risk and other security related concerns, debit cards are useful if you are the kind that prefers to spend your own money and avoid debts. Each user must determine their individual financial position before deciding what is better for them. If building credit is important and you know you are able to pay off the balance, a credit card is good. However, if you are not sure you will come up with that amount, stick with your debit card.

However, it is useful to carry a credit card with you. You never know when it might bail you out.