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Debit Card Versus Credit Card – Which Is Better?

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Visa reported that for the first time ever debit card purchases surpassed credit card purchases in the last three months of 2008. It would seem that consumers are finally getting on the band wagon that spending more than they can afford is not the best route for healthy finances.

Which card you should use when making purchases has been a topic of conversation for some time and many people lean decided in one direction while others could care less. One thing is certain, since 2003 Americans have been using plastic in each form more than cash or checks. Obviously the largest distinction between using the two lies in the origination of funds for purchases. Debit cards use money that is already in your checking account while credit cards use “credit” that you will be responsible for repaying at a later date. Here are a few other differences between the two cards.

Differences Between Credit Cards and Debit Cards

Security And Protection. Regulations and policies protect you in the event your credit or debit card are lost, stolen or used by an unauthorized person. While the protection is there for both, the level of protection differs for each card. If your credit card is lost or stolen and you notify your card company before charges have posted to your account you are not responsible for any unauthorized charges. If charges have already posted you will only be responsible for the first $50 of charges. Debit cards offer this protection as well, however you must notify your card issuer with two days of discovering unauthorized charges or the loss of your card. Notifying your card holder within two days limits your liability to $50. If you don’t notice the transaction within two days and report the charge between 2 and 60 days your liability increases to $500, after 60 days your liability could be limitless. In the meantime you are out that cash and even if you are credited the amount in the future, don’t expect the credit to appear in a timely manner.

Zero-liability policies. Visa and Mastercard offer zero-liability policies for credit card holders which means you are not responsible for any charges made when your credit card is not present. This covers online purchases or instances where credit card numbers are entered manually versus swiping the physical card at the merchant location. While zero-liability policies exist for debit card holders, it only applies to transactions that do not require use of your PIN.

Availability of Funds. When using your debit card you must first ensure you have the resources available in your checking account to cover your purchases. Consumers who are not particularly organized may find it difficult to track expenses and risk overdrawing their checking account if transactions are not noted properly. When using your debit card, know that transactions which require a signature generally take up to three days to clear while PIN transactions can clear immediately or within 24 hours.

Credit card purchases generally do not post to your account immediately, however an authorization to hold funds takes place. If you are close to approaching your credit limit using your card on several occasions in a short period of time may result in going over your credit limit resulting in additional fees and higher interest rates being applied to your balance.

Which is better – credit or debit?

It is clear that consumers enjoy the convenience and ease of using both debit and credit cards. Both options have benefits as long as they are used responsibly. The best way to manage your personal finances does not begin with how you pay for your purchases but with your spending habits themselves. If you stick to a budget and live within or below your means both options should serve your purchasing needs sufficiently.

The following is a guest post by DebtKid, who writes about his journey to get out of debt, and achieve financial stability. He runs a small software development company in Seattle and recently launched a new coupons section on his blog.


Published or updated December 15, 2011.
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{ 6 comments… read them below or add one }

1 Brad Castro

I know people who put everything on a credit card and then pay it off in full each month, but I still think a debit card is the better way to go for one very important but rarely articulated reason – you’re much more likely to track your daily expenditures in “real time.”

With a debit card, I can reconcile my bank balance daily and have a much better sense of where I am with my current budget. If I put everything on a credit card, it’s unlikely that I’m going to go through the trouble of signing in to monitor my credit balance and transactions – I’m more likely to just wait until I get the statement and be “surprised” by all the transactions I made and already forgot about.

From personal experience, the more aware I am of my finances the less I tend to spend.

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2 Curious Cat Investing Blog

A credit card is better. You just need to pay it off each month. In addition to the lost card issues just consumer protections for purchases (that you made) are stronger for credit card purchases as I understand it.

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3 Kristen

I think which card to use depends on the situation. In general I use a debit card, however, if I’m traveling I prefer to use a credit card because it does offer more protections. For regular, day to day expenditures, I think a debit card is fine … as long as you are very careful to track your expenses and not overdraw your account. The last thing you want to do is get an overdraft fee because you spent $1.65 too much at a fastfood place or something like that.

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4 ChristianPF

I agree with Brad – while there are advantages to using credit cards, I personally prefer to use a debt card. And to add to Kristen’s comment, if you use a bank like ING, they don’t have overdraft charges per se – they just charge you interest for the amount of time your are overdrawn. So instead of getting a $30 fee, you can get away paying 10 cents if you transfer money over quickly… Not a bad deal…

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5 Ryan

ChristianPF, I actually prefer credit cards – but I pay everything in full each month. There are more protections for credit cards, and the cash back, while not much, is a nice bonus. plus you get to float your charges for a month, so you earn an extra bit of interest each month (though again, it’s not much).

But I won’t recommend credit cards for anyone who doesn’t pay them in full each month!

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6 The Happy Rock

Although the federal laws are different for credit cards and debit cards, both Visa and Mastercard(the biggest issuers) have zero tolerance policies on all their cards to my knowledge.

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