Credit Center: Pros and Cons of Debit Card vs. Credit Cards

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Here's the differences - and the pros and cons...

"Will that be credit or debit?" It's a familiar question asked almost every time you make a purchase. Once reserved for individuals with excellent credit and high incomes, credit cards are more accessible than ever before. And debit cards are available to anyone with a bank account - with no credit checks at all.

The choice is often a personal preference. But whether you choose to use a debit card or credit card, you should know the pros and cons of each form of payment to ensure you're making the right decision. Here are the main differences between the two payment types and the pros and cons of debit cards vs. credit cards.

Debit Cards

Using a debit card is a simple way of accessing your personal bank account. Often referred to as an ATM card, every major bank / financial institution issues them. With a Visa or MasterCard insignia on the front, debit cards are accepted almost everywhere. Once a payment is authorized, funds are immediately removed from your bank account via electronic transfer.

PROS:

Payments are made directly from your bank account
Very easy to obtain
No identification required; authorization is confirmed by a personal identification number (PIN)
Limits purchases to items you can afford to pay for with cash
No added debt
No monthly bills or repayment
No charge for debit card transactions

CONS:

Limited by the amount of funds in your account
Must keep meticulous records to avoid fees
Less consumer protections - zero liability provided on debit cards is only a policy and therefore can change at any time, like interest rates and fees. The Electronic Fund Transfer Act gives you the right to dispute an error on your bank statement and gives you some protections.

Every debit card transaction should be recorded in a register (or log) to prevent overdrawing your account. Unlike credit cards, banks do not earn interest charges from debit cards, so they depend on fees to make money. The most common is an overdraft or insufficient funds fee. For example, if you pay for gas at the pump and drive away without taking your receipt, it's easy to forget to post the transaction and incur an insufficient funds fee later on when another purchase overdraws your account. Always keep your receipts and record and confirm your account balance in a timely fashion.

Credit Cards

Using a credit card is essentially like taking out a loan. Purchases are paid with a pre-approved credit limit, detailed on your monthly statement. You have the option of paying the entire balance in full, or you can choose to pay only part of the balance with the remainder carried over to the next month's statement - with interested added for the privilege. As long as you make regular on-time payments - you're account (and credit rating) will remain in good-standing.

PROS:

Monthly credit card statements provide an accurate and often categorized list of all purchases. This is particularly useful to businesses.
Allows you to make purchases when cash is tight.
Has a positive impact on your credit score (when handled responsibly)
The ability to withhold payment if you're unsatisfied with the quality of a purchase. The law is on your side when it comes to credit card purchases. The Fair Credit Billing Act protects your purchase with zero liability for fraudulent purchases, poor quality or damaged merchandise or for merchandise that was never received.
Ability to earn special perks such as airline miles, cash rebates and other rewards.
More security features, including product warranties and fraud liability protection
A better way to make phone or internet purchases

CONS:

Interest charges add up quickly
May lead to excessive credit card debt
Fees may apply for late payments and over-the-limit charges
Favorite target for fraud and theft by scam artists

Credit cards allow you to make purchases anytime you choose - even when you don't have any cash on hand. With a grace period of up to 30 days and the opportunity to payoff the entire balance by the end of the month, a credit card can be very useful. But be aware, credit cards can be dangerous too. Used improperly, credit cards can lead to excessive debt, a poor credit rating and even bankruptcy.

Most financial experts advise that debit cards should be used for most transactions. But keep at least one credit card for emergencies, and only use it in situations where it's absolutely necessary. For financially savvy (and responsible) individuals, a credit card can be used more frequently to earn rewards and other benefits. But the balance should be paid off as quickly as possible to avoid excessive interest charges. If you're recovering from bankruptcy, trying to reduce or eliminate debt, or completely lack self-control, avoid credit cards altogether and stick with a debit card.