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02/06/2015 Creditvs.DebitCards:WhichisBetter?

http://www.investopedia.com/articles/personalfinance/050214/creditvsdebitcardswhichbetter.asp 1/3

You probably have at least one credit card and one debit card in your wallet.You probably have at least one credit card and one debit card in your wallet.The convenience and protection that they offer are hard to beat in manyThe convenience and protection that they offer are hard to beat in manyinstances, but they have important differences that could substantially affectinstances, but they have important differences that could substantially affectyour pocketbook. Here's how to choose which one to use when you need toyour pocketbook. Here's how to choose which one to use when you need toswipe the plastic.swipe the plastic.

They Look Alike, But They're DifferentThey Look Alike, But They're Different

Credit and debit cards typically look almost identical, with 16-digit cardCredit and debit cards typically look almost identical, with 16-digit cardnumbers, expiration dates and PIN codes. But that's where the similarity ends.numbers, expiration dates and PIN codes. But that's where the similarity ends.Debit cardsDebit cards allow bank customers to spend money that they have by drawing on allow bank customers to spend money that they have by drawing onfunds that they deposited with the card provider. funds that they deposited with the card provider. Credit cards Credit cards allow consumersallow consumersto borrow money from the card issuer up to a certain limit in order to purchaseto borrow money from the card issuer up to a certain limit in order to purchaseitems or withdraw cash. Each card type has four main categories:items or withdraw cash. Each card type has four main categories:

Credit cards are issued as either standard cards, which simply extend a line ofCredit cards are issued as either standard cards, which simply extend a line ofcredit to its users; credit to its users; rewards cardsrewards cards, which offer cash back, travel points or other, which offer cash back, travel points or otherbenefits to customers; benefits to customers; secured credit cards, secured credit cards, which require an initial cash depositwhich require an initial cash depositthat is held by the issuer as collateral; and that is held by the issuer as collateral; and charge cardscharge cards, which have no preset, which have no presetspending limit but often do not allow unpaid balances to carry over from monthspending limit but often do not allow unpaid balances to carry over from monthto month.to month.

Credit cards generally work with your signature. Not so for debit cards. SomeCredit cards generally work with your signature. Not so for debit cards. Somedebit cards require using a PIN for every transaction, while others allow thedebit cards require using a PIN for every transaction, while others allow thecustomer to use a signature instead. There are also two types of debit cards thatcustomer to use a signature instead. There are also two types of debit cards thatdo not require the customer to have a checking or savings account. do not require the customer to have a checking or savings account. ElectronicElectronicBenefits Transfer (EBT) cardsBenefits Transfer (EBT) cards are issued by state and federal agencies to allow are issued by state and federal agencies to allowqualifying users to use their benefits to make purchases. qualifying users to use their benefits to make purchases. Prepaid debit cardsPrepaid debit cards give givenonbank customers a way to make electronic purchases up to the amount thatnonbank customers a way to make electronic purchases up to the amount thatwas paid in.was paid in.

There are many reasons why it makes sense to use one type of card over theThere are many reasons why it makes sense to use one type of card over theother.other.

Advantage: Debit CardsAdvantage: Debit Cards

Fees. Fees. Frugal consumers prefer to use debit cards because they usually have fewFrugal consumers prefer to use debit cards because they usually have fewor no fees of any kind, unless users spend more than they have in their accountor no fees of any kind, unless users spend more than they have in their accountand incur an overdraft fee. A 2006 report and incur an overdraft fee. A 2006 report by TNS Financial Services Consumerby TNS Financial Services ConsumerCredit Card Program revealed that about three-fifths of consumers who usedCredit Card Program revealed that about three-fifths of consumers who useddebit cards did so because it felt more like using real money. The no-feedebit cards did so because it felt more like using real money. The no-feeadvantage doesn't hold for prepaid debit cards, which frequently chargeadvantage doesn't hold for prepaid debit cards, which frequently charge

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Credit vs. Debit Cards: Which is Better?Credit vs. Debit Cards: Which is Better?AAAAAA | |By By Mark P. Cussen, CFP, CMFC, AFCMark P. Cussen, CFP, CMFC, AFC

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activation and usage fees, among other costs. By contrast, credit cards generallyactivation and usage fees, among other costs. By contrast, credit cards generallycharge annual fees, over-limit fees, late-payment fees and a plethora of othercharge annual fees, over-limit fees, late-payment fees and a plethora of otherfees and penalties, in addition to monthly interest on the card's outstandingfees and penalties, in addition to monthly interest on the card's outstandingbalance.balance.

Controlling spending. Controlling spending. A debit cardA debit carddraws on money the user already has. Compulsive spenders would do well dodraws on money the user already has. Compulsive spenders would do well douse debit cards and avoid the temptation of credit; retailers know people usuallyuse debit cards and avoid the temptation of credit; retailers know people usuallyspend more using credit cards than if they were paying cash.Interest and otherspend more using credit cards than if they were paying cash.Interest and othercharges paid by those who don't pay off their balances fund many of the usercharges paid by those who don't pay off their balances fund many of the userbenefits people get from credit card companies (see below).benefits people get from credit card companies (see below).

Advantage: Credit CardsAdvantage: Credit Cards

Rewards.Rewards. Unlike with debit cards, credit card users can reap cash, discounts, Unlike with debit cards, credit card users can reap cash, discounts,travel points and many other perks by using rewards cards. Smart consumerstravel points and many other perks by using rewards cards. Smart consumerswho can pay off their cards in full on time every month can profit substantiallywho can pay off their cards in full on time every month can profit substantiallyby running their monthly purchases and bills through them.by running their monthly purchases and bills through them.

Credit scoresCredit scores.. Credit card use is also reflected on the customers credit report, Credit card use is also reflected on the customers credit report,which allows responsible spenders to raise their scores with a history of timelywhich allows responsible spenders to raise their scores with a history of timelypayments.payments.

Warranties. Warranties. Credit cards can also provide Credit cards can also provide additional warrantiesadditional warranties or insurance for or insurance foritems purchased that may exceed those of the retailer. For example, if an itemitems purchased that may exceed those of the retailer. For example, if an itembought with a credit card becomes defective after the manufacturers warrantybought with a credit card becomes defective after the manufacturers warrantyhas expired, check with the card company to see if it will provide coverage.has expired, check with the card company to see if it will provide coverage.

Legal protection. Legal protection. These are also notably different, with credit cards offeringThese are also notably different, with credit cards offeringmore security.more security.

Liability for lost or stolen cardsLiability for lost or stolen cards. Credit cards still offer much greater protection. Credit cards still offer much greater protectionin most cases for those whose cards are lost or stolen. As long as the customerin most cases for those whose cards are lost or stolen. As long as the customerreports the loss or theft in a timely manner, his/her maximum liability forreports the loss or theft in a timely manner, his/her maximum liability forpurchases made after the card disappeared is $50. The purchases made after the card disappeared is $50. The Electronic FundsElectronic FundsTransfer Act Transfer Act now gives debit card customers the same protection from loss ornow gives debit card customers the same protection from loss ortheft but only if the customer reports it within 48 hours of discovery. After 48theft but only if the customer reports it within 48 hours of discovery. After 48hours, the customers liability rises to $500; after 60 days there is no limit.hours, the customers liability rises to $500; after 60 days there is no limit.

Disputing transactions.Disputing transactions. The The Fair Credit Billing Act Fair Credit Billing Act allows credit card users toallows credit card users todispute unauthorized purchases or purchases of goods that are damaged or lostdispute unauthorized purchases or purchases of goods that are damaged or lostduring shipping. But if the item was bought with a debit card, it cannot beduring shipping. But if the item was bought with a debit card, it cannot bereversed unless the merchant is willing to do so. What's more, debit cardreversed unless the merchant is willing to do so. What's more, debit cardvictims don't get their refund until due process has been completed. Credit cardvictims don't get their refund until due process has been completed. Credit cardholders, on the other hand, are not assessed the fraudulent charges made inholders, on the other hand, are not assessed the fraudulent charges made intheir names. While some credit and debit card providers offer zero-liabilitytheir names. While some credit and debit card providers offer zero-liabilityprotection to their customers, the law is much more forgiving for credit cardprotection to their customers, the law is much more forgiving for credit cardholders.holders.

Car rentals. Car rentals. If you need toIf you need to rent a car, rent a car, most credit cards provide some sort of most credit cards provide some sort ofwaiver for collisions. Even if you want to use a debit card, many car rentalwaiver for collisions. Even if you want to use a debit card, many car rentalagencies require customers to provide credit card information as a backup. Theagencies require customers to provide credit card information as a backup. Theonly way out may be allowing the rental agency to put a hold of perhaps a fewonly way out may be allowing the rental agency to put a hold of perhaps a fewhundred dollars on their bank-account debit card as a form of surety deposit.hundred dollars on their bank-account debit card as a form of surety deposit.



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The Bottom LineThe Bottom Line

Smart shoppers who can control their spending are probably wise to reap theSmart shoppers who can control their spending are probably wise to reap thebenefits offered by credit cards for the majority of their purchases. Debit cardsbenefits offered by credit cards for the majority of their purchases. Debit cardsprotect the frugal from fees and ensure that less disciplined spenders stay withinprotect the frugal from fees and ensure that less disciplined spenders stay withintheir means. For more information on the proper use of credit and debit cards,their means. For more information on the proper use of credit and debit cards,consult your bank or financial advisor.consult your bank or financial advisor.

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