As many of you may recall I recently attended the first ever financial blogger conference where I met more than a hundred other finance bloggers. While introducing myself and this blog they’d often ask if I primarily blog about credit and debit cards. I was asked many times if I blog about the difference between the two aforementioned payment methods and which is better. What could I say other than the truth? I had never once covered debit versus credit cards in a blog post. Flabbergasting, I know.
To be fair, I started writing this blog (and picked the name) while I was still working on my undergrad at Arizona State University (Go Sun Devils!). At the time I was taking my core finance classes, including those in accounting. The name of this blog comes from the accounting terms, not the payment tools, so it honestly never dawned on me to write about the difference between the two.
All of that being said, I figure it’s about time I talk about Debit versus Credit (cards).
Let’s get things started off with a question. Which is your preferred payment method? A debit card or a credit card? Leave your comments below (and vote on the poll).
I personally use my debit card for most of my everyday purchases. That may change in the future, or it may not. Up until about a month ago I received reward points when using my debit card, which were shared with my credit card reward points. My bank recently dropped their debit rewards program (of course this is far better than a $5 a month debit card usage fee — looking at you Bank of America).
Let’s cover some of the more commonly-known differences between a debit and a credit card first.
- Money is withdrawn from your linked checking account, generally immediately (sometimes delayed by as much as a business day).
- You can often run the card through two different payment methods, e.g. credit (VISA/MC network) or debit (or through EFT: electronic funds transfer) — either option you choose will withdraw the money directly from your checking account
- Money is charged to an open line of credit you have established, which will then require repayment
- You can only run the credit card through one payment method
The important stuff
When you use your debit card you take on a certain amount of liability risk through something known as card blocking as well as through fraud.
Card blocking is when a merchant places a hold on a certain dollar amount (typically a preset amount, say $50) when you use your debit OR credit card to buy something. This is most common when buying gasoline for your automobile. When you use your debit card you’ll want to be cautious of your card information being stolen because if it is and someone uses your card it could end up causing you to overdraft, or not have enough money in your checking account to pay your bills.
Be careful when using your debit card and avoid using it to purchase things online if you can. Having worked at a bank in the past I’ve seen people’s checking accounts have hundreds of dollars (or more) withdrawn from a fraudulent debit card purchase and then they find themselves without any money in their account until all of the money is refunded (can take as long as 7-10 business days) or they are paid again.
When you use your credit card you’re taking on very little fraud risk as most credit card companies offer zero liability fraud guarantees. The downside to using a credit card is the associated fees. Read the fine print when applying for a credit card because you want to know what you are getting yourself into. There are three typical fees you’ll encounter with a credit card: an annual fee, minimum finance charge and a regular finance charge.
Some credit cards have annual fees. I won’t get into whether these are worth it or not. It might be. It might not be. That’s very situational. You’ll want to try and avoid credit cards with minimum finance charges, where you get charged a minimum finance charge every single month you use your card. A regular finance charge, of course, is the interest you pay on your credit card balance. Most cards will have a set period of time where if you pay the balance in full you won’t be charged any interest.
How I use my cards
As I mentioned earlier I prefer to use my debit card for the majority of my everyday purchases (I limit my personal liability through structuring my bank accounts a certain way — more on that later). I use my credit card anytime I buy something online. I also use it for non-everyday purchases. Gadgets, home appliances, auto repairs, etc. I always make it a point to pay off the credit card before the grace period is up, so as to avoid any finance charges. I’ve been successful with this about 75% of the time since I started using credit cards in my early 20s. That percentage has been closer to 90% over the past couple of years.
What do you prefer when making purchases? Your debit card or a credit card? Leave your comments below