Credit Cards vs. Debit Cards: A Comprehensive Comparison
"Credit cards and debit cards have the exact same benefits."
I've heard this statement for a long time, but I wanted to test it out to see if it is true. Unfortunately, we often pass along information we received because we either assume it to be true, or we've heard it from a single reputable source. (See also: 10 Tricks to Save Money with Credit Cards)
Basic differences between a debit card and a credit card
When you use a credit card, the credit card company essentially extends you a loan for the amount purchased. You typically sign for the purchase, and when they send you a bill, you are obligated to pay your balance. If you do not, the credit card company will charge you interest rates and fees.
A debit card is associated with your bank account. When you make a purchase, that exact amount of money is taken out of your bank account within days. When you use a debit card, you typically use a PIN number.
The cards look the same, are scanned the same, but are very, very, different.
Which offers the best card protection benefits? Credit Cards.
Credit card purchases are covered under the Fair Credit Billing Act. The act states that when you purchase something with a credit card, you have no liability for fraudulent purchases, damaged goods, and products that were never delivered.
If you make a purchase with a debit card, the Electronic Transfer Act does provide some protection during a dispute or error. If you notify your bank within two days, your liability is limited to $50. However, between two days and six days your liability could increase to $500. Waiting more than six days could mean you have no coverage.
Currently, Visa and MasterCard do have policies in place to protect consumers. MSN reports:
Visa and MasterCard also offer zero liability for unauthorized transactions made over their networks.
But, Visa does have an exception for negligence, and MasterCard also has an exception for those with delinquent accounts or who have reported unauthorized use within the last two years.
Remember, debit cards rely on card policies for protection, while credit card liability is the law.
Which offers the most convenient way to resolve a problem with purchases? Credit cards.
In the case of debit cards, MSN Money claims
Consumers must try to resolve the dispute with a merchant on their own before they contact their debit card issuer. "The merchant may want to make some other arrangement like a store credit or a gift certificate or some other thing," says Hogarth, of the Fed. "That isn't exactly putting money back in your account."
My experience: I recently purchased a product online with my credit card. The item has a full 60-day money back guarantee, but after four emails were not returned, I made a call to my credit card company. Within a day, the money was put back into my account and the credit card company took full responsibility. It sounds like the process would not have been so simple with a debit card.
Which is better if you work for a company that uses a reimbursement system? Credit cards.
With a credit card you have the ability to delay or float payments. This is especially convenient when you use a reimbursement system with your employer. You can make the purchase today and you have 30-40 days until the payment is due. For anyone who makes purchases on behalf of their company, a credit card certainly carries the advantage.
Which is better when renting a car? Credit cards.
Most major credit cards offer an auto rental collision damage waiver. In addition, several major car rental companies do not accept debit cards as a form of payment.
My experience: Last year, our family was in Australia and I wanted to use a debit card to rent a car. In order for the company to accept my debit card, I would need to let them to put a $500 hold on our checking account. Since we planned to spend cash for purchases on our vacation, I wasn't sure that we had enough available balance for the hold so I used a credit card. When I returned the vehicle, they billed the charges on to the debit card. On that occasion I was glad to have a credit card in my wallet.
Which is better for avoiding credit card debt? No brainer — debit cards.
This, by far, is the strongest argument in favor of the debit card. If it helps you control your spending and helps you avoid credit card debt, then that one feature alone is as precious as gold. If you currently have credit card debt or are trying to get out of credit card debt, then cutting up the credit card and using a debt card is probably one of the smartest decisions you can make.
Which provides more rewards? Credit cards.
Credit card rewards are one of the primary reasons why people use credit cards. Anti-credit card people say that credit cards don't really offer valuable rewards, but I'll let you be the judge.
PerkStreet Financial is an example of a bank that is now also offering cash back for debit card purchases.
Which is best to use overseas? Depends on your particular bank and credit card.
Depending on your bank policy and your credit card foreign currency exchange rate, either one might be better. In my case, my ATM charges a 1% fee for use overseas, but I do have a Schwab Visa card that offers a 0% foreign currency exchange and 2% cash back. However, it is not uncommon to pay a 3% foreign currency exchange fee with a credit card. If you plan to travel overseas, you will need to explore the best way to exchange foreign currency before heading on your trip. (See also: Using Your Debit Card on the Road)
Which is more expensive? It depends on use.
Both debit cards and credit cards have associated fees. Looking at one of my credit card fees and finance charges, if I miss a payment, I'll pay between $15-$39. If I don't pay my balance in full, the default APR (annual percentage rate) is 23.99%. Yes, that is expensive.
A person who overcharges her account five times in the month and a person who pays a month of interest and late payments are probably paying a similar amount in fees.
Moral of the story: Both are extremely expensive to use if you don't plan to learn how to budget and properly manage your finances. If you don't track your spending well, both could mean a financial train wreck is waiting in your future.
Ultimately, it comes down to this last question.
Do debit cards feel more like real money? I'm undecided.
A recent TNS Financial Services Consumer Credit Card Program Study indicated that over 60 percent of consumers prefer using debit cards to credit cards as a payment vehicle, because debit feels more like "real money."
Ultimately, I'm yet to be convinced.
Does sliding a plastic ATM card feel more like money than a plastic credit card? I've personally never felt the difference. Do you?
Last year I totaled all my credit card purchases to find out if I really spend more with credit than cash. I was actually surprised by the results because I saved money by using a credit card. As such, I'm guessing we really can't answer this question until someone sits down and does some real research.
Choose whichever method best helps you manage your money, but realize credit cards do clearly have more benefits. The risk may outweigh the benefits, so I'm not suggesting you use a credit card. Also, you might consider comparing the cost of paying cash versus either a credit card or debit. Just understand the differences, and then make an informed decision.
What are your thoughts regarding the true differences between credit cards and debit cards?