Most people use a debit card and have one or more credit cards in their wallet. But how many know all the differences between the two and which is best to use in certain situations?
The most basic difference is that each time you use a credit card, you’re borrowing money that may have to be paid back with interest. A debit card, on the other hand, simply transfers your own money from your checking account to the vendor you’re paying.
Both credit and debit cards are convenient, quick and easy. They’re also safer than cash, because cash cannot be replaced if lost or stolen. Which one should you use? The answer depends largely upon your lifestyle.
Credit cards allow you to buy now and pay later. Unfortunately, this can turn into a nightmare because of the obvious financial pitfalls in being able to purchase things you don’t have the money for now. If you think you’ll be tempted to overspend, regular credit card use may not be ideal for you.
However, it’s nearly impossible to incur thousands of dollars of debt through debit card usage. Most credit unions will cover purchases that put your account into the red, but only up to a few hundred dollars. If this happens, you’re accountable for your purchases and charged an overdraft fee.
The convenience of debit cards can make fraud more likely. Unless reported promptly, debit card theft or fraud can quickly drain your account. Credit card companies are held to strict liability laws: Consumer liability for credit card fraud is limited to $50. If you report suspicious charges in a written request within 60 days, the company is obligated to investigate and restore the funds to your account if the charges are determined to be fraudulent.
For debit card fraud, your liability is $50 if you notify the credit union within two days of seeing the fraudulent charges. After two days, your liability increases to $500. If you report the activity 60 days or more after it happened, you may be liable for all of it. Although many credit unions have implemented voluntary plans to limit customer liability to $50, there is no federal law requiring them to do so. If you suspect fraud on your account, call 877-GO-FSUCU or 888-918-7774 (after hours or weekends) immediately.
In addition to stricter liability laws, credit cards offer consumer protection on purchases. You can always cancel a charge if you are the victim of an online scam or bought something that was never delivered or wasn’t what you expected. This makes credit cards the ideal choice for large or fragile purchases that will be delivered to your home.
One major draw for credit cards is the points awarded for purchases. That’s a strong advantage over debit cards. The ability to earn airline miles or get a cash rebate is attractive to many consumers. Of course, you may be paying for those miles with a high interest rate or an annual fee.
Don’t get hooked on the points. Research each card carefully to make sure you’re really getting your money’s worth.
Another important benefit to using a credit card is establishing or restoring a positive credit history. Debit card usage may encourage responsible spending, but a major factor in measuring your credit score is your credit card usage. Occasionally using a credit card and paying your bill on time can really improve your credit rating. This, in turn, improves the likelihood of earning favorable terms for home loans, auto loans, personal loans and more.
Annual Fees and Interest
A strong disadvantage of credit cards is the money you spend to keep them. Some cards charge an annual fee, and the interest on your credit card bill can easily be a third of your payment or more. If you’ve overspent one month and are unable to cover the entire amount due, you may need to pay only the minimum payment. More of your payment will soon be going toward interest than toward lowering your bill. This makes the next payment higher, and again you’ll be paying a significant portion toward interest. This is often how credit card debt spirals. Interest becomes a huge hurdle, making it nearly impossible for the consumer to make headway.
If you don’t think you will be able to pay your bills in a timely manner, keep credit card usage to a minimum and stick with withdrawing your money from your checking account with a nice, safe debit card.
As an FSU Credit Union member, you already have access to fantastic rates and optimal security. To find out which debit or credit card is best for you, give us a call at (850) 224-4960.