Plastic Wars:Credit vs Debit
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Credit or debit? – an important question for those trying to come out ahead in recessionary times. The answer can be a little complicated. It depends on a few things, namely, your spending habits, your ability to pay your bills on time, and the total dollar amount that you pay with debit and credit. These are the variables that you can control. Unfortunately, they’re not the only ones.
What remains to be seen are the clever tricks credit card providers will play in light of the major reform that was recently signed into law by President Obama that will go into effect in 2010. About the best you can do is take advantage of the existing rules and set yourself up for future financial success.
An Easy Choice for Some
For starters, those whom the credit card companies have feasted on can be packaged into one of the following categories.
Group #1 – Buys a little or a lot, carries a balance, pays on time.
Group #2 – Buys a little or a lot, carries a balance, doesn’t pay on time.
If you’re in one of these two groups, the answer is simple. You have been targeted. Cut up your credit cards now. If you’re using credit to pay for things you can’t afford, you are digging yourself a big hole. Even with the new regulations that will go into effect next year, credit card companies will still be able to charge late fees and whatever fee they desire. Don’t let them. Switch to paying with debit. The “I need a credit card to survive” argument is a pretty weak one, regardless of circumstance.
A New Target?
Where it gets more interesting is when you consider those who have used cards responsibly. They fall into one of the following two groups:
Group #3 – Buys a lot, no balance, pays on time, uses credit to get rewards.
Group #4 – Buys a little, no balance, pays on time, uses credit to get rewards.
The question of credit or debit is not quite as simple for these responsible bill payers that have used credit cards as a means to reap financial reward. Creditors have long offered rewards to target these consumers. In theory, it should be safe to assume that those who have credit cards for their rewards are responsible bill payers – if you’re paying 15% interest on 2% rewards, you have some things to sort out.
With the industry set to take a financial hit on regulations aimed to protect those who are typically hit with fees and high interest, there has been mention of industry backlash against the users who have been responsible and not contributed as much to the credit card companies bottom lines. It won’t be long before the industry responds with new or old ways to make up for lost revenue. If annual fees are re-instated or rewards are cut back, those who have a choice of credit or debit and may have to make some decisions regarding which they option they choose.
Debit Card Rewards – A Game Changer?
To make matters more interesting, many debit cards have begun offering rewards in the last few years. Debit card rewards tend to be a little less enticing than credit card rewards, however. Banks generally offer one point for every $2 spent with a debit card, compared with one point for every $1 spent with a credit card.
It’s worth noting that many debit card rewards programs require you to use the “signature” option of your card, which means the card is swiped, you sign for the purchase and the transaction is run through the merchant’s processing system, versus punching in a PIN code. This is because the bank collects an interchange fee for that transaction from the merchant, which would be less if you paid with the debit option using your PIN. The bank then uses those fees to offset the cost of the rewards program.
Additionally, many debit rewards cards are charging annual fees. Those that don’t tend to offer highly scaled back rewards. Less rewards, annual fees, and the possibility of getting dinged on fees for going below your checking account minimum balance? This model has a little work to do.
Seeking Optimal Return at the Lowest Expense
Regardless of how the industry changes the fees and rewards for responsible card users, the goal here should be to get the highest total return. If you spend a lot (group #3) and benefit from hundreds or thousands of dollars of rewards each year, it may make sense to eat the expense of an annual fee and use a credit cards, both of which should point towards bigger rewards.If you don’t spend much (group #4) you may want to opt for a debit card or credit card with no annual fee, even if the rewards are small. Whichever way you choose, it is important to pay your bills on time, not carry over a balance, and stay above your minimum in your checking account.
For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.
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30 Comments so far
leave a commentYou forgot that credit cards build your credit, and they offer more protection. This stuff is all on GOogle.
I think I fall into the “Funnel everything through your credit card so Mint can keep track of it” group.
Seriously, I haven’t used a debit card in years, all I have is a credit card that I use. I make all of my purchases I can with it, and I keep the balance at 0. My question is, does that help my credit score?
Why don’t you just add your checking account/debit card to Mint also, so that you can track your full financial picture?
Then it doesn’t matter which card you use to purchase, outside of the reasons set forth in the article.
CASH BACK DEBIT IS MY CHOICE!!
Owwwwweeeeech
Check this out too.Electronic Cigarette
For credit card holders in Group #3, in addition to card rewards you get the advantage of keeping all of your cash until the end of the billing cycle. If your cash is in an interest-bearing account, you should to take into account potential lost interest revenue when deciding if it’s worth switching to debit cards.
Considering nearly all checking and savings accounts interests rates do not even come close to keeping up with inflation, that argument doesn’t really make much sense. I prefer to spend money I have rather than money I don’t or could possibly not at the end of the month. Debit cards are the way to go. Cash is better.
Indeed. Something else to consider is that money used on debit card is gone instantly. It’s just simpler dealing with returns, fraud, and cash flow with credit cards.
I wonder why I haven’t been getting rewards on my Debit Card Purchases. “This is because the bank collects an interchange fee for that transaction from the merchant, which would be less if you paid with the debit option using your PIN. The bank then uses those fees to offset the cost of the rewards program.” Thanks for the input guys.
Like what John kind of touched on, you might want to mention that some credit cards offer more protection for purchases, including additional warranties and that sort of thing.
I’m not sure if it’s true or not, but I have read that if you have a debit card (that is also for example a Visa) you get the additional protections if you process the transaction as ‘credit’. If you process the transaction by ‘debit’ then you don’t.
This article is truly terrible. It gives no real insight or any usable information. As a previous commentor noticed, it neglects some other side effects of using either credit or debit.
what’s cash back debit?
John is correct. Federal regulations make fraud recovery for debit cards rediculously harder than credit cards, plus a debit card holder is personally out for up to ten times more even if the fraudulent charges are removed.
Also,
“Seriously, I haven’t used a debit card in years, all I have is a credit card that I use. I make all of my purchases I can with it, and I keep the balance at 0. My question is, does that help my credit score?”
Yep. Check your free annual credit report from the gov. Every month you keep your account in good standing with status ‘always pays, never late’ your credit rating improves.
Well I get a 4.1% interest rate from my bank, but only if I use my debit card at least 11 times per month, they also waive all ATM fees on any ATM if I use it 11 times, so Debit pretty much win with me as I am currently get in the range of 50-80 dollars in interest a month and I would be foolish not to use it.
For group #3. If you pay your bills on time, then you’re paying NO interest, so there is no downside to reaping the rewards. I don’t think you really understand that credit card companies are providing “no-collateral” loans, so when you don’t pay what you owe, then yes, you will be hit with large fees. It’s their only recourse.
Credit Cards are tools that provide an unparalleled level of consumer protection that debit cards can not match. You can’t dispute debit charges. If a person is stupid and doesn’t understand that they shouldn’t spend money that they don’t have, then they’ll be fine. If not, then why not let the credit card companies thrive on stupid people? Buy some stock and get in on the fun.
You’ve provided some pretty poor advice in your “article”
Don’t forget that Debit doesn’t offer the protections of a Credit card. There was a breach of security at a local grocery store and all hell broke lose for those using Debit.
A great advantage that wasn’t mentioned in the article was the fraud protection that a credit card offers you. If a criminal gets access to your debit card information, your bank account is compromised. That money is gone, until you go through the process of getting it back from your bank. If this is your general use account, this could mean your rent/mortgage, other bills, etc will not be paid. This is costly and inconveniencing.
With a credit card, you will not be out of pocket if your account is compromised. Most credit cards have a very efficient dispute system. You haven’t lost a dime when they get your account.
I’ll also mention that this works best when you pay your entire balance on time and use a no fee card. Otherwise, the fees and interest can become a draw on your finances
what about using a debit card AS a credit card? i have a card attached to my checking account. when i buy something, i can tell the merchant i want to use it as a credit card. yes, the cash comes right out of my bank, but i have no balance to carry and the bank gives me cash back for purchasing that way.
its the best of both worlds, IMO!
Visa actually offers protection for signature based transactions on debit cards. You must select the “credit” option, though. It’s difficult, though possible, to dispute PIN based transactions should something arise.
However, do not make the mistake of assuming that selecting “credit” somehow benefits your credit score. It is still (basically speaking) a cash transaction.
Check with your financial institution about the interchange fee that takes place. Usually, by selecting “credit,” your institution collects a small fee from the merchant. In some cases, this fee goes to your financial institution…where it can be used to keep fees down.
It never hurts to give them a call and ask how that works.
If your debit card carries the Visa logo you have all of the same fraud and dispute protection as you do with a Visa credit card.
Informative post, thank you. Although I use both, I was intrigued by Matt Kelly’s comment that the Visa logo on a debit card gives that card all the same protections as a credit card. I’m not sure if this is true but I will research it further.
Here are the tricks to look forward to from the Credit Card Companies:
1. If you have a credit card with a high credit limit you will be getting a notice that your credit limit has been reduced to $1,000 above your current balance.
2. Credit card companies will be increasing your minimum payment amount from say, 2% to 3%, this is announce in the mail and if you don’t see it, or read it, you may not be paying enough for your minimum balance if it is an automatic payment from your bank. If you have a high balance, it could raise your payment several hundred dollars.
3. Credit card companies are mailing out notice of rate increase with instructions to contact them if you do not agree with the new terms. If you dont contact them they will raise the rate, even if it was a fixed rate agreed upon during a balance transfer.
4. If you don’t like the rate increase the Credit Card company tells you to close your account so you can then arrange to pay it off at the original minimum payment and interest. No matter how you look at it your credit gets screwed, the Credit Card companies are blaming Obama’s legislation as the reason for the recent actions.
5. Don’t be late on any utility payment or loan payment, if the Credit Card company pulls your credit report they will use that late payment as justification to start messing with you.
6. If you were living paycheck to paycheck and all of a sudden the Credit Card increased your minimum payment, you might be forced into default. If all the cards you carry balance on does the same you are deffinatley screwed…..
7. Thank God for bankruptsy laws…..
Yes people, please stop posting that credit cards offer “protection” so are better than using the ATM card. Every debit card I’ve ever had in the past several years has had the VISA logo on it, so it works just like a credit card. In fact, if you use the “credit” option you will avoid the 45-cent (or greater) ATM fee that many retail vendors or your bank will charge you for using the “debit” option. Yet it comes right out of your account, the same as if you chose the debit option. Check it out for yourselves!
I don’t like signature debit or credit cards. They both end up costing the consumer in the end. The banks take a percentage of every purchase you make from the merchant. The merchant must make this up by charging the consumer more for their products. You get your 1% back at a cost of 4%. It doesn’t make much sense to me. I use a pin-only debit. It’s a lot less expensive to the merchant which saves consumers money. It is also more secure because a thief must have your card and your pin to use it. Most times merchants don’t bother checking the signature on the back of your signature debit card. This means thieves can steal with a card swipe and no pin entry. Stop giving up your hard earned money to the banks. Anything that costs the merchant money costs you money.
What it all boils down too is..
join a credit union..you dont have all this to contend with.
I am a member of the Postal Credit Union through My sister who is now retired with the postal service.
My interest rates have not changed and the monthly newsletter promises this very thing.
Check with your credit union(s) that are available to the public…you might be pleasantly surprised when you transfer those high interest balances to one of their cards or better yet..take out one of their loans they offer to pay those high cards off and cut up the card(s) dont use them..except maybe 2 small purchases a year to keep them active.Just dont close your account(s)..those accounts help your available credit scores with the three major credit reporting agencies in good standing. What may seem it would take an “expensive debt advisor” will only save you money again in the long run.
Person to person money transfers with a PIN secured debit card is the key the future and has many benefits.
Here’s the biggest reason that credit cards are the one to use!
It’s all about the potential liability. Legally, your ultimate liability for fraudulent use of a credit card is generally only $50.
Debit cards can hook you for $500 and that’s if you report it within 48 hours. The problem also could be a drained bank account then bounced charges there after.
Here’s a great article on this subject of liability:
http://www.pirg.org/consumer/banks/debit/debitcards1.htm
I think credit cards always offer more protection.
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Cash is king, baby. If you at all care about any of the businesses you’re patronizing, specifically small businesses, you are killing them every time you use a credit card or debit card, even though credit is worse. Who do you think is paying for those miles and great gifts — it comes off the back of those businesses. One percent, 2%, 3% is the difference between whether or not your neighborhood cleaners or garden center survives. They’re the ones who pay, and they ultimately have to drive the price higher to cover your fees. Think about that next time you see those Visa commercials making someone look like an idiot for using cash… It’s all manipulation by the advertisers.
I do my budget and give myself a cash allowance every week. It forces me to spend on whatever I want within those limits, it keeps me out of debt, and it helps local merchants at the same time. Cash is king for a reason…