Credit vs Debit? What's best for you?

Credit vs Debit? What's best for you? There is one fundamental difference between credit cards and debit cards. With credit cards, you can use the card issuer's money now and pay it back later. With debit cards, you use no one else's money but your own. What is the best one for you?

Credit Cards:

Credit cards essentially provide you a revolving credit line, accessible and available on demand, and payable every month, either in full or partially. The credit card issuer sets a spending limit which you should not exceed, under pain of stiff penalties and high interest charges. Normally, those who pay off their entire balance due for the statement period are not charged any interest. Credit cards do not remove your need to use money; they merely delay your parting with your money until the time comes to pay the card issuer.

Debit Cards:

Debit cards work like, and are usually linked to, your checking account. It is also possible to link debit cards to other types of deposits, e.g. mutual funds or savings accounts. In that sense, debit cards are ATM cards. In the 1990s, the largest credit card brands arranged with banks to "co-brand" their ATM cards, so that you now have MasterCard and Visa debit cards. This is very convenient when you make purchases because, like their credit cards, MasterCard and Visa debit cards are accepted in millions of establishments worldwide. Used in this manner, debit cards function like paperless checks. The card issuers do not extend you credit when you use debit cards; it is your money that pays the merchant, taken immediately from the linked account.

Other features: - Debit cards can be used only with a personal identification number (PIN), making them more secure than credit cards, in case they fall into the wrong hands. However, you may now arrange for PINs on your credit cards.

- Debit cards instantly reduce the money available in your deposit account, while credit cards allow you to make credit purchases at no interest (during the grace period).

- Since your account is instantly reduced by debit cards, you lose the chance to withhold payment (e.g. for a purchased item that later turns out to be a lemon), or, as you would do when paying by check, order a stop payment. Because of the lag in payment, credit cards allow you to dispute bills or hold payment until the issue is settled.

- You don't pay any interest charges with debit cards, unlike with credit cards. However, this is applicable only to those who carry balances on credit cards. Those who settle their bills in full every month also do not pay interest.

- If you charge too many items on debit cards, you could incur an overdraft. This exposes you to the risk of overdraft penalties. If you exceed the spending limit on credit cards, you are exposed to over-limit interest charges and penalties.

- For those who use debit cards with care, you will realize that they develop a sense of spending discipline that may not be possible with credit cards.

Prudence may dictate that you should have both debit cards and credit cards. With experience, you will be able to determine the situations where it is appropriate to use one or the other. Debit cards do give you the advantage of built-in discipline, but there are times when there's not enough balance in the bank account and you will have to use credit cards to pay for the transaction at hand.

About the Author:

Richard Greenwood is co-founder of The Click 4 Group which runs a number of finance comparison websites including www.click4credit.com.au which compare products including debit cards and credit cards.

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