You’re standing in
the checkout line and face this familiar choice: should you pay using your
credit card or debit card? According to VISA and Mastercard, the majority of
people choose debit. Below are 20 reasons why they made the wrong choice, and
why credit cards are better.
Whenever you use a
credit card, you are borrowing money from the credit card issuer, who in turn
pays the merchant. Then, at the end of the month, the credit card issuer sends
you a statement listing all of your charges, and you repay the money you
borrowed plus any interest on that debt. If you pay off the entire amount each
month by the due date, you pay no interest. In contrast, whenever you use a
debit card, the debit card issuer takes the money directly from your bank
account and pays the merchant. You pay no interest since the debit card is simply
used to access your own money in a manner analogous—but much quicker—to writing
a check on your account. So, with a credit card you borrow money to make
purchases and repay that money at the end of the month, while with a debit card
you are simply accessing your own money. Why is it better to charge it?
20 reasons why it’s
better to use your credit cards instead of your debit cards:
1. Rewards. The most obvious advantage to using credit
cards is that you may earn a reward for each purchase you make. The reward may
come in various forms, such as airline miles, “points” which can be used to
purchase other goods or services, or cash. Reward credit cards are readily
available. Indeed, a survey conducted by the Federal Reserve Bank of Boston in
January 2010 found that 60 percent of consumers have a rewards credit card.
While many consumers love to earn miles to buy future airline tickets, or
points toward the purchase of their favorite consumer products, I favor cash
rewards. As an example, my Blue Cash EverydaySM American Express card pays
rewards of 3% for grocery store purchases, 2% for gas or department store
purchases, and 1% for anything else. My Fidelity Investments Investment Rewards
VISA card pays a flat 1.5% reward for every purchase, which is deposited into
my Fidelity brokerage account. There are many articles on the web discussing
different credit card reward programs, with their details.
In contrast, many
debit cards either do not have a reward program, or their rewards are very
small in comparison to those of credit cards. While banks had been improving
their debit card reward programs in attempts to encourage their use, many of
these programs have since been made less lucrative or even discontinued
completely in response to the Federal Reserve’s lower caps on debit interchange
fees which went into effect in 2011. For example, while my Citizens Bank debit
card had been paying me 10 cents for each debit card transaction, this reward
was terminated on November 30,2011, after the lower debit interchange fees went
into effect. With this cap in place, it is unlikely that banks will improve
their debit card reward programs to the point where they can effectively
compete against the reward programs of credit cards.
2. Float. Most
credit cards offer a grace period during which you will accrue no interest on
your purchases if there is no outstanding balance on your card at the time of
purchase. The length of this period is typically 20 to 30 days from the end of
your billing cycle. Provided you pay your balance in full each month on or
before its due date, you will owe no interest on your purchases. The float acts
as an interest-free loan which, if you make a purchase at the start of your
billing cycle, can last as long as 50 to 60 days. You can use this grace period
to accumulate the money needed to pay for your purchases, or can use your money
for other purposes during this time.
In contrast, you do
not benefit from float when you make a debit card purchase. The money for each
debit purchase is electronically taken from your bank account at the time of
the purchase.
3. Convenience.
Credit card purchases and debit card purchases can both be more convenient than
cash purchases since you don’t need to worry about having enough cash in your
wallet. However, credit card purchases can be more convenient than debit card
purchases since you don’t need to worry whether the amount of your purchase
exceeds the amount in your bank account that’s linked to your debit account. As
an example, assume you’d like to purchase a lawnmower costing $300. Also assume
your checking account contains $100, your savings account contains $500, your
credit card has a $3000 limit, and your debit card is linked to your checking
account. If you try to use your debit card to make the purchase, you will
either incur a bank overdraft fee (ranging from $10 to $38, with a median of
$27), or the transaction will be denied, since the amount of the transaction
would exceed the amount in your bank account. In contrast, if you use your
credit card, the transaction will occur without a hiccup as long as you remain
under your credit card limit of $3000. Of course, you will still need to pay
the credit card charge when it comes due, but you’ll have the convenience of
the float period to accumulate the money needed to pay the bill, and you could
pay using proceeds from a different account.
4. On-Line
Payments. Credit cards are widely accepted by online merchants, and are often
the only acceptable method of making payment. By using a credit card to make
online purchases, you also typically receive a host of consumer protections
that may be very helpful if you have a problem with the purchase. These
protections include theft and fraud protection (see Reason # 11 below),
purchase protection (Reason #12 below), and help with resolving disputes with
your seller should the item turn out differently from the way it was described
(Reason #14 below). By using a reward credit card, you can also earn a reward
for your purchase (Reason #1 above).
In contrast, most
online merchants do not accept debit cards. Even if they do, there are several
reasons to avoid using a debit card for online purchases. Since the debit card
is linked directly to your bank account, the money could be drained from your account
before you even realize there’s a problem. Even if you are ultimately
successful in proving that the money should not have been taken from your
account, it can be difficult to have it actually put back. You also do not
benefit from the consumer protections built into credit card transactions,
discussed herein.
5. Build Credit
History. Your credit card issuer will report your credit card payments to one
or more of the three consumer credit companies: Experian; EquiFax and
TransUnion. Thus, by making your payments on time, you will build and improve
your credit scores. Having a good credit record will help you obtain a
mortgage, car loan, student loan, etc. at favorable interest rates. (Of course,
it’s essential to pay your credit card bill in a timely manner to avoid adverse
impacts on your credit score.) Even if you’re in the enviable position of not
needing to borrow money, it’s still important to keep a good credit history
since companies increasingly use credit scores for diverse reasons such as
screening job applicants and setting car insurance rates.
In contrast, debit
card transactions are not traditionally reported to the credit rating agencies
and they will not help you build or improve your credit score. It may seem
unfair to penalize people who reliably pay their bills using debit cards, but
that’s still the way it works. There are attempts to encourage the credit
rating agencies to consider debit card transactions in their scoring
algorithms. For example, Suze Orman’s new prepaid debit card (called the
“Approved MasterCard”) has an arrangement under which its transactions will be
reported to TransUnion. However, this arrangement is still for research
purposes only, and it is currently unknown if TransUnion will end up actually using
this information in its credit scoring algorithms.
6. Deposits. If you
are renting a piece of equipment such as a garden tiller or a carpet cleaner,
then the rental agent may require a hefty deposit. If you use your debit card,
you must make sure you have enough money in your checking account to cover this
security deposit, and you will lose access to this money. If you use your
credit card, you will still have access to the money in your checking account
and, after you return the equipment, you won’t have spent anything.
7. Future Travel.
If you make hotel reservations for three months from now, you can use your
credit card to secure the reservation without having any charges made against
your card until your stay. Should you then cancel your reservation in
accordance with the hotel’s cancellation policy, no charges will be made
against your account. On the other hand, if you use your debit card, you’ll
lose access to your money since it will be immediately deducted from your
account. Should you then cancel your reservation, you’ll need to wait for the
money to be put back in.
8. Automatic
Recurring Payments. Many people set up automatic recurring payments to pay for
their monthly bills such as utility bills, cable bills, cell phone bills,
newspaper subscriptions, etc. If you use your debit card for payment, then
you’ll need to remember to write these payments into your account register to
avoid expensive overdraft charges. You will also need to insure that you keep
enough money in your checking account to pay these automatic fees as they become
due. This level of oversight eliminates many of the benefits of automatic
payments.
By setting up your
automatic recurring payments to charge your credit card, you can simply wait
until you receive your monthly statement to review these charges and then make
one payment.
9. Car Rental
Loss/Damage Insurance. When you rent a car, the car rental agency will
typically try to sell you extra insurance coverage such as a loss or collision
damage waiver and supplemental liability coverage. Prices vary widely by agency
and location, but can be between $8 and $35 per day for the loss damage waiver
and $8 and $20 per day for supplemental liability coverage. As a result,
selling this coverage is often a significant profit center for the rental
agencies, and so they use hard-sell tactics to encourage you to buy them. But
accepting these options when you don’t need them can be expensive, with the
cost often outweighing the cost of the car rental itself!
Some credit cards
provide car rental coverage which can allow you to decline this coverage and
significantly decrease your overall rental costs. I specifically keep a credit
card for the purpose of providing good car rental coverage to avoid these extra
costs. It’s important to review your credit card agreement, and contact your
personal car insurance agent and credit card company to ask questions, before
declining this extra coverage..
In contrast, debit
cards do not generally provide car rental insurance.
10. Price
Protection. Many credit card issuers offer price protection which will refund
the price difference if you find a lower price on same item from the same
manufacturer within a certain time period. The procedure for using this
protection is spelled out in the credit card agreement.
Debit card issuers
generally do not offer this benefit.
11. Theft and Fraud
Protection. When you make a purchase with a credit card, you receive multiple
protections under the Fair Credit Billing Act. You have no liability for
damaged or poor-quality merchandise, or merchandise that is never delivered.
You also have no liability for unauthorized purchases if you report the loss of
your card before it’s used, or for unauthorized use of your card if only your
credit card number is lost. Further, your maximum liability if your card is
stolen and used before you report the loss it is limited to $50, as long as you
report the loss promptly. Many credit card companies will even waive the $50
maximum liability. Finally, during the time when the purchase is in dispute,
you are not required to pay the amount in dispute and retain access to your
money, and you’ll get help resolving the dispute from your credit card company.
Debit card
purchases are not covered by the Fair Credit Billing Act, and you will not
receive the benefits of its protections. If your debit card issuer provides
zero liability, it is only a feature of the debit card and is subject to
change. You do have some protections under federal law if your debit card is
stolen, but they depend on how quickly you report the loss. If you report the
loss of your card before it’s used, you are not liable for any unauthorized
transfers. If you report the loss within 2 business days from when you notice
the loss, your liability for unauthorized use is limited to $50. After the 2
business days, your potential liability increases to $500. And if you fail to
report the loss within 60 days after your bank statement showing the unauthorized
loss is mailed to you, then you can lose all the money in your bank account.
Further, since the money is taken immediately from your bank account at the
time of the unauthorized transfer, it is much more difficult to have the money
actually put back into your bank account so you can use it.
12. Purchase
Protection. Some credit cards protect eligible purchases against accidental
damage or theft for a period of time after their purchase, typically 90 days
and up to a certain maximum amount. So if you drop your iPad computer onto a
concrete floor a month after you buy it, you’re covered for the loss. Debit
cards do not generally provide this protection.
13. Extended
Warranty Protection. Credit cards often
offer extended warranty protection which extends the original manufacturer’s
warranty. Some cards double the OEM’s warranty period.
Debit cards
generally do not offer this protection.
14. Resolving
Disputes with a Seller. If you have a dispute with your seller and pay using a
credit card, the credit card company typically provides a procedure for
resolving the dispute. If you follow this procedure, you can make the credit
card company your advocate in resolving the dispute, and can avoid paying until
the dispute is resolved. In many cases, your card company will have more clout
with the seller and protect your interests more effectively than you can.
If you use your
debit card, the money is immediately taken from your bank account and you’ll be
on your own in trying to resolve the dispute with the seller. You’ll also be
out the money you paid unless and until you convince the seller to refund
payment. This is a particular problem with internet purchases where the seller
may be out of state, or even out of the country.
15. Lost Luggage
Protection. Some credit cards protect your luggage if you pay for your common
carrier tickets using your credit card. Debit cards do not generally provide
this protection.
16. Holds on Hotel
Rooms or Gas. Hotels often place holds on your account to pay for potential
charges for room service, telephone calls, internet service, movies, the
mini-bar, etc. These holds can be for several hundred dollars in upscale
hotels. These holds will have little effect on your credit card account as long
as your spending doesn’t approach your spending limit. But if you use a debit
card, these holds may wipe out your bank account balance and potentially cause
an overdraft. Gas stations also often place holds on your account exceeding
your gas purchase.
17. Paying for
Reimbursable Expenses. If your employer reimburses you for travel expenses,
it’s best to use a credit card to pay for your purchases. By using a credit
card, you can submit your expenses and receive your employer’s reimbursement before
your credit card payment is due. In contrast, if you use your debit card, then
you’ll need to effectively loan these funds to your employer from the time you
make the purchases until the time you receive the reimbursement.
18. Special Deals.
Credit cards provide occasional special deals where you can earn discounts or
rebates on certain purchases. For example, my Fidelity Investments Investment
Rewards VISA card recently offered 2500 bonus points (worth $37.50 in its 1.5% cash
reward program) simply for using the card to pay for a hotel during a
three-month period. For another example, my wife and I received $10 theme park
admission discounts by using our MasterCard for payment. Special deals such as
these are much less common in the world of debit card payments.
19. Emergencies. An
important benefit of using credit cards is during emergencies where you may
incur large, unplanned expenditures. You can instantly borrow a large sum of
money from your credit card without needing to find the time or ability to
deposit money into your bank account. For example, if you need to evacuate
during a hurricane, you can use the credit card to finance your hotel and
eating expenses for a few days of emergency out-of-town travel. (Of course,
it’s a good idea to keep an emergency fund, which you can then use to pay off
these expenses.) In contrast, your debit card spending would be limited to the
amount in your checking account.
20. Miscellaneous
Benefits (Read the Fine Print). It’s amazing what you may learn by closely
reading your credit card agreement! You may find that using your credit card to
make payments brings you a host of benefits you didn’t know about. You may find
that you are entitled to roadside assistance, hotel/motel burglary insurance,
travel insurance coverage, emergency ticket replacement, free telephone calls,
bond coverage, or other benefits. Read the fine print to see the details of
what’s covered and how to qualify. In contrast, debit card purchases are simply
a means to pay using your money, and they rarely provide similar additional
benefits.
The Reality
Despite all of the
advantages of using credit cards instead of debit card, statistics show that
more people use debit cards to pay for their transactions than credit cards.
During 2010, for VISA-branded credit cards, there were 28.6 billion debit card
transactions against only 9.4 billion credit card transactions. For MasterCard,
there were 8.46 billion debit card transactions against only 5.85 billion
credit card transactions. See the data provided at
http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#Purchase-transaction-volume-issuer.
So a very good question is … why do the majority of people choose the wrong
card to make their payments?
One situation in
which it makes sense to use a debit card rather than a credit card is when the
merchant does not accept credit cards. For example, I use a debit card to
purchase groceries at Aldi’s because this store does not accept credit cards,
and the use of my debit card is more convenient than paying cash.
Another situation
in which it makes sense to use a debit card is where the debit card has a
special link to a retailer that provides advantages. For example, the REDcard
debit card from Target is a special debit card linked directly to your checking
account that provides a healthy 5% savings on your purchases at Target stores
and at www.Target.com.
Many debit card
transactions are also made by people who cannot obtain a credit card due to a
poor credit history, or a “thin” or no credit history. Other debit card
transactions are made by people who are unable to obtain robust credit cards
that provide rewards and other advantages as discussed above. For such people,
one of their financial goals should be to improve their financial situation to
the point where they can qualify for a high-quality credit card that provides
these rewards and other benefits.
A large number of
debit card transactions are made by people who are trying to limit their
outstanding credit card debt and avoid its corresponding high interest charges.
While this makes sense for some people, it has the unfortunate side effect of
denying the advantages of card usage to these people.
Finally, other
debit card transactions are made by people who believe such transactions are
closer to using cash than credit card transactions since the money is taken
immediately from their bank accounts. Unfortunately, these people are missing
out on one of the best financial tools available: the credit card.
Source: http://tipstoretireearly.hubpages.com
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