Credit or Debit? How to Choose at the Checkstand
For years bankers have envisioned a cashless society. We may not be there yet, but we are moving in that direction. Between debit cards and credit cards and online ways to move money such as PayPal, we’re carrying fewer greenbacks in our wallets.
When it comes to paying with plastic, though, there are heated debates about which is better – debit or credit. Some experts, like Dave Ramsey, think credit cards are too great a temptation and warn consumers to stick with debit cards only when they need them. Others, such as the Privacy Rights Clearinghouse, advise shoppers to “dump their debit cards.”
In this article, we’ll give you the pros and cons of each so you can make up your own mind.
Choose a Button
When you check out at the cash register, you will likely have the choice of “debit” or “credit” on the keypad. If you are using a credit card, you’ll choose credit, of course. But with a debit card (a.k.a. “check card”), you have the choice of credit or debit. Which one should you choose?
Offline versus online
A debit purchase can be processed as an “offline” or “signature-based” transaction by choosing the credit key. An offline purchase is similar to writing a check. It will take a little time to post to your bank account.
When you choose the “debit” option on the keypad, however, you must enter your P.I.N., and that’s considered an “online” or “PIN-based” transaction. Your purchase is authorized immediately and the money is debited from your available balance right away.
Why do I care?
Banks that issue debit cards prefer that you use your debit card offline (using the credit button) because the fee the merchant pays for offline transactions is higher. That means more money from that fee makes its way back to the card issuer. Because they make more money that way, there may be incentives if you use your debit card without the PIN. For example, your card may allow you to earn rewards only when you choose credit. Occasionally there are penalties for using your PIN. Your issuer may charge a fee for transactions when you choose debit but allow you unlimited free signature-based (credit) purchases.
Most merchants who accept credit cards carrying the Visa or MasterCard logo accept those debit cards as well, but there are some exceptions. Some rental car companies, for example, require a credit card to reserve or rent a car. And, Dollar Rent a Car will check your credit each time you use a debit card to rent a car, creating a potentially score-damaging inquiry on your file.
Hotels may place a “hold” for your expected stay on your credit or debit card. That can be a hassle with a credit card if it means you don’t have the funds to make other purchases. But it can cause real problems with your debit card because a hold essentially “freezes” money in your bank account. Checks may bounce even though you may have enough money in your account to pay the bills. Gas stations and rental car companies also put holds on your card for the full amount of the charge and sometimes an additional percentage.
Also keep in mind that debit cards are typically not reported to the credit reporting agencies. So while a credit card can help you build a stronger credit score, as long as you keep your debt low and pay on time, a debit card doesn’t offer the same advantage.
Credit card fees are common. Annual fees, over-the-limit fees, bounced check fees, and late fees have all been on the rise, according to research by the non-profit organization Consumer Action. You should be able to avoid fees, however, if you are very careful to make sure every bill gets paid on time. If you are charged a penalty, ask your card issuer to waive it. If you have a good payment history, you should be able to convince them to reverse the penalty.
On the other hand, most debit card fees have disappeared, though some issuers may still charge a small annual fee, monthly fee, or transaction fee (especially for PIN-based purchases). Be sure to ask about fees when you sign up for a check card, an speak up right away if you find a new fee on your bank statement.
A federal law called the Electronic Funds Transfer Act (EFTA) covers debit card transactions. Under that law, your card issuer can only hold you responsible for the first $50 if your debit card is lost or stolen, as long as you report it within two business days of learning about the problem. Wait too long, however, and you could be out much more. You could even lose your entire account balance plus any overdraft line of credit.
Federal law isn’t the only word on this issue, however. The major card associations, MasterCard and Visa, require member card issuers to offer "Zero Liability" policies. With Visa's Zero Liability policy, for example, you won't be responsible for fraudulent charges to your Visa Debit card, unless by chance the thief used your PIN number and the transaction is processed on a network outside Visa's network. (Even then, you would still be protected under the EFTA rules limiting your liability to $50 if you report the loss or theft promptly.)
Keep in mind that even if you aren’t out the money you lose to a debit card thief permanently, it can take a while to get funds back into your account. In the meantime, you could be scrambling for the money you need to pay your bills.
Federal law gives issuers ten business days to temporarily credit your account when your debit card has been compromised. (That deadline is extended to twenty business days in the case of new accounts.) Visa requires members to provisionally credit your account within five business days, though, and reports that many issuers will credit your account within 24 - 48 hours. Bank of America, for example, offers credit within the next business day if your card is lost or stolen and used by a thief. MasterCard offers zero liability for most debit transactions as well.
Credit cards, on the other hand, fall under the Fair Credit Billing Act, which protects you from losing more than $50 if a thief uses your account. Technically there is no time limit for disputing fraudulent use of a credit card, though the card issuer may be suspicious if you wait too long. Since you are using the card company’s money, it doesn’t matter how long it takes you to report the loss, or how long it takes them to resolve it. Still, you want to resolve it as quickly as you can.
When you buy something with a debit card, it is similar to paying by check except for the fact that you can’t “stop payment” on a debit card purchase. The money comes out of your account quickly. If there is a problem, you will have to convince the merchant to accept a return or credit your account. In other words, you don’t have a lot of leverage because the store already has your money.
With a credit card, you have an extra layer of protection in the Fair Credit Billing Act. While that law doesn’t cover buyer’s remorse, it does cover situations where the “goods or services weren’t delivered as agreed” or when you are billed for the wrong amount, double-billed, etc. When that happens, you can dispute the charge in writing through your credit card company and withhold payment on that charge while your card issuer investigates. These “chargeback” procedures can motivate a merchant to work things out with you.
More and more debit card issuers are offering rewards programs, though the benefits, such as travel rewards or cash back, aren’t nearly as rich as you may get with a reward credit card. And you often forgo the rewards for purchases when you use your PIN.
But credit card reward programs, while more attractive, come with a price if you carry a balance. Do the math and you’ll find that the higher interest you’ll likely pay on your reward card dwarfs the benefits you may be trying to get. If you’re carrying a balance, you will usually come out ahead by sticking with a card with the lowest rate possible. But if you always pay in full, get a reward credit card, and you can truly get something for nothing. (And with the float, you can use the bank’s money for free for a month or more.)
The tendency to overspend when using plastic “play money” is one reason Dave Ramsey and other financial counselors recommend cutting up the credit cards and sticking to cash unless a debit card is absolutely necessary. But if you are someone who keeps your budget and checkbook balanced, a credit card may provide rewards and protection that debit cards don’t.
Keep in mind that you can overdraft your account with a debit card, especially on a signature-based transaction. Some financial institutions will allow you to use your check card for an amount you don’t have in your bank account – and then charge you a hefty fee for this “overdraft protection.” This means that a debit card may not be safer if you don’t stay on top of your spending.
Whether you choose to use a debit or credit card — or both — it’s a good idea to set up online account monitoring so you can receive alerts regarding any unusual activity on your account. The faster you catch fraud, the less time and money you are likely to spend straightening it out.
Now that the facts are in, which do you prefer: debit or credit?
A high credit score often equals savings on loans and credit cards.
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