Credit Cards versus Debit Cards
Most consumers typically have both a credit card and a debit card. Of course, the biggest difference between the two is that a debit card will immediately take money out of your bank account when used, unlike a credit card, which will pay for the purchase and later add the amount of the transaction to your monthly statement.
But are there any other differences between the two?
It turns out that there are some major differences that you may not be aware of. Also, it’s important to note that both debit and credit cards have their own distinct advantages and disadvantages.
Here are a few situations where choosing between a debit and a credit card can make a great deal of difference:
When You’re on a Budget
A debit card is a clear winner when it comes to sticking to a budget since you can only access funds that are already in your bank account. Of course, the possibility of over-spending still exists with a debit card, but the fact is that sticking to a budget can be a lot harder when you have the temptation of the buy-now, pay-later scenario that credit cards offer.
Cash Back and Other Rewards
Credit cards clearly excel in this category, with users being rewarding with everything from cash back on monthly spending to accessibility to other discounts and travel bonuses. Of course, these bonuses are negated if you carry a large balance on your credit cards but can be extremely profitable if you pay off your credit card balance each month.
Renting a Car
If you rent a car, using a credit card can usually offer you more protection than using a debit card, although some car rental agencies are changing this as more consumers begin to use debit cards to rent cars. But as it stands today, if you use a debit card to rent a car, you will typically also have to provide a back-up credit card to protect yourself against possible damages incurred while driving the car.
Using a debit card will do nothing to increase or decrease your credit score while using a credit card responsibly can help you build your credit. Of course, if your credit card is not used responsibly and you incur over-limit fees, late payment penalties, or over-utilize the card, your credit score can drop as well.
Liability Limits for Lost or Stolen Cards
Credit card companies offer the most protection against lost or stolen cards, with a maximum of $50.00 for any unauthorized charges, providing that those charges are reported on a timely basis. While some banks offer the same level of protection for debit cards, the debit card holder will have to report the lost card or erroneous transaction within 48 hours to be guaranteed the same $50.00 maximum liability level. The same goes with transaction disputes, with some banks matching credit card liability levels, while others do not offer the same protection. It’s clear that both debit and credit cards have their own very specific place in your wallet. It’s up to you to use them both to your advantage.
About the Author
Carroll W. “Bill” Hayes, MBA, CFP® Mr. Hayes started his financial career at Merrill Lynch in 1989. In 1992, Bill left Merrill Lynch for Fidelity Investments. During his career at Fidelity Investments he held roles in various divisions of Fidelity. Those roles included positions in the Trust, 401(k), Brokerage, and Money Management divisions. Bill held management positions at Fidelity and in 2001 led a Private Access team based in Boston. In the Private Access role his responsibilities included managing a book of business in excess of $3 Billion and a client base that was international in scope.
In 2008 Bill established Charles Carroll Financial Partners. The firm is an Independent FeeOnly Financial Planning and Investment Management firm. Charles Carroll Financial Partners embraces its fiduciary responsibility to its clients.
Bill is a graduate of Marquette University, and holds an MBA from the Sawyer School of Management. Bill holds the designation, CERTIFIED FINANCIAL PLANNER, and currently presides as a Commissioner on the Disciplinary and Ethics Commission of the Certified Financial Planner Board of Standards. Bill resides in Massachusetts with his wife Christine and travels up and down the East Coast meeting with clients of the firm.