By Andrew Housser
Everyone seems to be using plastic these days to pay for purchases. Using a credit or debit card is certainly easier than carrying a wad of cash, but both carry some risks. When you swipe a card at a checkout card-reading machine, you will be asked to choose between credit and debit. Before you hit "enter" for either option, weigh the pros and cons of each.
What's the difference?
The main difference between credit and debit cards is where funds come from. Debit cards draw money directly from your bank account. Credit cards offer a line of credit from which you can borrow money to make a purchase or even take out extra cash. Choosing the "credit" option when paying with a debit card does not affect the payment source. The purchase amount is still deducted from your bank; the action simply saves you the step of having to enter your personal identification number (PIN). It also prevents others in line from possibly seeing your PIN.
Are you good at budgeting?
When you choose to pay with a debit card, you might be less tempted to spend more than you can afford, since the money you spend will be automatically deducted from your bank account. If your purchase exceeds the funds in your account, your account will be overdrawn. Many banks offer overdraft protection that allows you to exceed your account balance. But by doing so, you'll incur interest and fees. Using a debit card to pay bills and expenses also can give you a simple way to see where your money goes each month.
Can you pay off your credit balance?
When you make a purchase with credit, you're making a promise to the credit issuer to pay back, at a later time, the money you borrowed. If you pay back the full amount within the billing cycle (usually 30 to 45 days), you will not have to pay interest. Some cards carry steep interest rates of up to 30 percent, so it is in your best financial interest to not carry a balance. Pay off all charges, on time, every billing cycle.
What is your safety comfort level?
Someone who steals your debit card can quickly make enough purchases to drain your bank account. As noted in No. 1 above, someone else does not need your PIN. You can dispute the charges, but it can take weeks for a bank to investigate your claim and refund your money. In the meantime, you may be dealing with bounced checks or rejected automatic withdrawals. Federal law makes it much easier to dispute fraudulent charges made on credit cards than on debit cards. Disputed credit charges are often removed immediately (so you do not have to pay for them or pay interest). Plus, the bank can quickly issue you a new card.
Do you need extra cash?
By choosing the debit option and entering your PIN, you can request that the cashier give you extra cash. This amount is then deducted from your bank account along with the purchase amount. The cash-back debit option is a good, convenient way to avoid out-of-network ATM fees if you find yourself in need of cash.
Do you want extra perks?
Credit card issuers are more likely than debit card issuers to reward spending with incentives like airline and hotel points, cash back or other shopping rewards. Some stores now offer discounts (5 percent to 10 percent off) if you use their store-issued debit card to make purchases while shopping. Like your bank debit card, a store debit card withdraws funds directly from your bank account.
Do you need to improve your credit score?
Routinely charging and paying off credit charges each month helps bolster your credit score. Even if you can't pay the full amount, making on-time monthly payments helps your rating. Using a debit card does nothing for your credit score.
Whether you choose the debit or credit option largely depends on your current financial situation and the purchase you want to make. You may have the bank funds to make a $300 purchase, for example; however, choosing credit may be wise if you're trying to accrue reward points, and you know you will be able to pay the bill in full when it comes due. With either card, the key is to not spend more than you can afford.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.