BY MARK P. CUSSEN
You probably have at least one credit card and one debit card in your wallet. The convenience and protection that they offer are hard to beat, but they have important differences that could substantially impact your pocketbook. Here’s how to choose which one to use when you need to swipe the plastic.
They Look Alike, But They’re Different
Credit and debit cards typically look almost identical, with 16-digit card numbers, expiration dates and PIN (personal identification number) codes. But that's where the similarity ends. Debit cards allow bank customers to spend money by drawing on funds that they have deposited at the bank. Credit cards allow consumers to borrow money from the card issuer up to a certain limit in order to purchase items or withdraw cash.
Credit cards are issued in four categories:
Standard cards simply extend a line of credit to their users.
Rewards cards offer cash back, travel points or other benefits to customers.
Secured credit cards require an initial cash deposit that is held by the issuer as collateral.
Charge cards have no preset spending limit, but often do not allow unpaid balances to carry over from month to month.
All of them they generally work with your signature.
Not so for debit cards. Some debit cards require using a PIN for every transaction, while others allow the customer to use a signature instead.
There are also two types of debit cards that do not require the customer to have a checking or savings account:
Electronic Benefits Transfer (EBT) cards are issued by state and federal agencies to allow qualifying users to use their benefits to make purchases.
Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was loaded on the card
How Debit Cards Work
Advantage: Debit Cards
Fees. Frugal consumers may prefer to use debit cards because there usually are few or no associated fees, unless users spend more than they have in their account and incur an overdraft fee. (The no-fee advantage doesn’t hold for prepaid debit cards, which frequently charge activation and usage fees, among other costs.) By contrast, credit cards generally charge annual fees, over-limit fees, late-payment fees and a plethora of other penalties, in addition to monthly interest on the card’s outstanding balance.
Controlling spending. A debit card draws on money the user already has, eliminating the danger of racking up debt. A 2017 NerdWallet and Harris Poll study found that almost three-quarters of Americans who primarily use debit cards for everyday purchases (71%) say they had been in credit card debt before. Retailers know people usually spend more using plastic than if they were paying cash. By using debit cards, impulsive spenders can avoid the temptation of credit. Interest and other charges paid by those who don’t pay off their balances each month fund many of the user benefits offered by credit card companies (see below).
Advantage: Credit Cards
Rewards. Credit card users can reap cash, discounts, travel points and many other perks unavailable to debit card holders by using rewards cards. Consumers who pay off their cards in full and on time every month can profit substantially by running their monthly purchases and bills through rewards cards.
Credit scores. Credit card use is also reflected on a consumer’s credit report, which allows responsible spenders to raise their scores with a history of expenditures and timely payments.
Warranties. Credit cards may also provide additional warranties or insurance for items purchased – above those the retailer or brand is offering. If an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, for example, it's worth checking with the credit card company to see if it will provide coverage.
Liability for lost or stolen cards. Credit cards still offer much greater protection than debit cards in most cases. As long as the customer reports the loss or theft in a timely manner, his/her maximum liability for purchases made after the card disappeared is $50. The Electronic Funds Transfer Act gives debit card customers the same protection from loss or theft – but only if the customer reports it within 48 hours of discovery. After 48 hours, the customer’s liability rises to $500; after 60 days there is no limit.
Disputing transactions. The Fair Credit Billing Act allows credit card users to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping. But if the item was bought with a debit card, it cannot be reversed unless the merchant is willing to do so. What’s more, debit card victims don’t get their refund until an investigation has been completed. Credit card holders, on the other hand, are not assessed the disputed charges; the amount is usually deducted immediately and restored only if the dispute is withdrawn or settled in the merchant's favor. While some credit and debit card providers offer zero-liability protection to their customers, the law is much more forgiving for credit card holders.
Car rentals. If you need to rent a car, many credit cards provide some sort of waiver for collisions. Even if you want to use a debit card, many car rental agencies require customers to provide credit card information as a backup. The only way out for a customer may be allowing the rental agency to put a hold of perhaps a few hundred dollars on his or her bank-account debit card as a form of surety deposit.
The Bottom Line
Smart shoppers who can control their spending are probably wise to reap the benefits offered by credit cards for the majority of their purchases. Debit cards protect the frugal from fees and ensure that less disciplined spenders stay within their means. For more tips on savvy use of credit and debit cards, go to the consumer pages at the Federal Trade Commission and Consumer Financial Protection Bureau websites, or talk to your banker.