On a recent trip to South America many things stood out, but the thing that was most staggering was not the adventure itself, but rather meeting people who had cashed in their 401K’s and those who were traveling across the country on credit. I also met those who were traveling across the country with the funds in their debit accounts, which gave me hope.

Traveling with your debit card

Understanding your cash flow, in and out, each month will help you with conscious spending. The use of your debit pulls funds that you have earned; the money is in your account and you are not borrowing on interest. With debit you are paying yourself and purchasing things that you want or need. Many people look at their bills and think “I work so hard for this money and still can not get the things I want” (hence the credit concerns that are currently effecting our national economy).

Allow “shift” to happen, shift your thoughts into the power of the money you have earned and the ability you have to pay your bills. Being grateful that you get to pay for electricity and water each month, being grateful that you get to pay your mortgage or rent. Shifting the thought that you have towards money allows the relationship to become positive and in turn may even increase the financial inflow that you have.  Understanding the power that debit has as well as the power credit can have, when not abused, is a key component to financial well-being.

Traveling with your credit card

Is it all generational or cultural- this push for credit and purchases that we can not afford?  Recently in Peru I met a couple riding across the country on their BMW motorbikes, they talked of withdrawing monies from the ATM from their card. The deeper the conversation went I realized they were talking about debit; they were using monies they had earned and saved because they had it…neither owned a credit card. They were Australian and the generalization to the country may be way off, but as an American in a debt riddled country it was an inspiration. The thought that life without credit could lead to 7 months traveling from coast to coast!

With the way our economy works, it is recommend to still have a credit card.  The benefit of knowing that if you ever have an emergency–not the weekend sale at Macy’s–a true emergency you have a way to cover it yourself. Think of credit building in terms of G² (G-squared), the 2 G’s that if placed on credit and paid off each month will help build your limit and increase your financial standing. Groceries and Gas. If you only use your credit card, outside of emergencies, on groceries and gas and pay it off before your interest accrues you will build your credit and if you pick the right card you will also earn rewards (trips, gift cards… even cash).  Those rewards can even be placed back into your banking account thus creating the full circle of debit vs. credit.

Today’s post is brought to you by Danell Lynn, M. Ed. Photo courtesy of Wade Stubbs, Bergaliaboys.com

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.

Debit card

• 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

Credit card

• 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

You likely know the difference between using your credit card or your debit card, but do you know when it’s more appropriate to use your credit card rather than your debit card, or vice versa?

The most obvious difference between using your credit card or your debit card is the way the funds are taken from you. Use your debit card and the money is pulled out of your checking account, but if you use your credit card it will be added to any existing (if any) loan balances on your credit card statement.

Beyond whether or not you’d like the funds to come directly from your checking when making a purchase there’s no glaringly obvious reason why you should use one card versus the other, but if you take a look at some of the fine print you’ll start to realize there are obvious benefits to using your credit card instead of your debit card, or the other way around. Let’s take a look at just a few of them.

A few reasons why you should pay with credit:

• When you shop online. When you buy something from the internet you’ll want to use your credit card because the funds don’t come immediately out of your checking. This way if you have any disputes with the online merchant you can call up your credit card company and get the charge removed. This also works to protect your cash balances because if someone somehow gets a hold of your credit card number they can only ring up a bill that you don’t have to pay (because you didn’t charge it), but if they get ahold of your debit card number they can cause you one major headache.

• When you buy a big-ticket item. You might not be aware of this but most credit card issuers offer an extended warranty on anything you buy with credit. Obviously you’ll want to review your credit cards terms but this can come in handy as some credit card issuers automatically double the manufacturers warranty.

• When you want to build your credit history. Using your debit card won’t build you any credit but if you use your credit card and pay it off on a monthly basis you’ll start to build your credit up quickly.

• When you want to rent a car. Many credit cards offer damage protection coverage when you pay for a rental car with them. This offers the same coverage as the damage insurance that car rental companies will try to sell you. Pay with your card and save yourself some money.

• You want to earn points. Most credit cards nowadays offer reward points which can be redeemed for cash, gift cards and even airline tickets. If you don’t mind using your card for everything and paying the bill off at the end of the month you’ll rack up the points real quickly.

A few reasons why you might want to pay with Debit:

• You want cash. If you want to get cash quick without paying any ATM fees then just use your debit card and ask for cash back at the merchant. Quick, free and easy.

• You want to avoid interest charges. Obviously if you use your credit card you will likely be charged interest for any purchases you put on your credit card. This is not the case when you use your debit card because the funds are transferred automatically out of your checking account.

• You don’t want (yet another) bill to pay. Let’s face it, we’re overrun with bills every single month. If you want to streamline your life and just don’t want to have yet another bill to pay then use your debit card. If you don’t have a balance on your credit card then you don’t get a bill. Good stuff!