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Revisiting the Credit vs. Debit Card Debate

Which option offers better security and benefits?

spinner image Credit vs. Debit
There are several factors you should weigh when deciding whether to use a credit or debit card for a purchase.
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I’m one of about 143 million Americans whose personal data has been compromised. Chances are you may be one as well. That means criminals could now have our Social Security numbers, birth dates, addresses and, in some instances, driver's license numbers. There are many good articles about protecting yourself in light of the Equifax data breach. Consumer advocate Clark Howard says the safest way to protect yourself is to freeze your credit, which will shut down a criminal trying to steal your identity.   

In light of the Equifax news, I’m going to address the pros and cons of debit vs. credit cards, including security breaches, from large-scale ones all the way down to someone stealing just your card or number.

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Though debit and credit cards look virtually identical, they aren’t. A debit card is essentially a check. As soon as you use it at a retailer, the funds are gone from your checking account and you have spent your own money. When you buy something on a credit card, you are spending someone else’s money that you have agreed to pay back. If you pay your credit card bill in full each month, you will typically pay no interest. Otherwise, you usually pay a high interest rate that isn’t even tax deductible.

Pros and cons

Let me first say that if you don’t pay off your credit card in full every month, you should probably take a pair of scissors to them right now. That way, you will be forced to use a debit card and can only spend money you have, which will provide more discipline. In looking at the pros and cons of debit/credit card usage, I’m categorizing a credit card as a charge card. Here are five criteria I used to compare the two types of cards.

1. Security: Advantage credit cards

Both credit and debit card numbers can be stolen. In the event of an improper charge, you file a claim in either case, but with a debit card, the money is out of your account and you have to fight to get it back. With a credit card, you don’t pay this money while a dispute is being investigated and aren’t immediately out the money. Further, you have more leverage than with a debit card. In the case of credit card fraud, you typically won’t be liable for more than the first $50 of fraudulent charges, and most credit card companies waive this amount. In the case of debit card fraud, you can be out as much as $500. In both cases, you should report a lost card or fraudulent charge immediately.  

2. Fees: Advantage debit cards

While many credit cards charge annual fees, debit cards usually don’t. And, of course, the credit card annual fees are charged automatically to your card, making them far less noticeable, and so you just keep paying, year after year. 

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3. Rewards: Advantage credit cards

Many credit cards offer perks such as airline miles or cash back. They may also offer free rental car insurance and may extend the warranties on your purchases. Debit cards typically don’t offer these perks. Lisa Gerstner, contributing editor at Kiplinger’s Personal Finance, told me that though some debit cards now offer points, they don’t do so as commonly as credit cards. Some banks and credit unions offer high interest rates on savings tied to your debit card usage. However, I’ve found the extra interest is much less than credit card rewards such as 2 percent cash back.

4. Discipline: Advantage debit cards

Even if you pay your credit card off monthly, using a debit card may help you spend less. Having purchases deducted immediately from your checking account could make you more aware of the impact of your spending on your account balance and cause you to think twice about the necessity of a purchase. With a credit card there is a greater time gap between purchase and payment, which may result in your being less aware of your spending. Of course, using cash will make you spend even less.

5. Float: Advantage credit cards

Because you are spending someone else’s money, the credit card issuer is essentially lending you money interest free if you pay your bill in full every month. It might not seem like much, but if you average a $2,000 balance and stash your cash in a higher-interest savings account paying 1.2 percent, this amounts to about $24 annually. If interest rates rise, this amount will be larger.

My advice

I think credit cards are superior for people who pay their bill in full every month. These cards are more secure, generally offer more rewards, and in many cases don’t have annual fees. I use two credit cards exclusively which both provide 2 percent cash back on every purchase, as I’ve found airline miles and other point rewards becoming increasingly less valuable. Both have no annual fee. I loved the $1,400 cash back I got over a two-year period but realized I spent $70,000 to get it. So the cards probably did cause me to spend more than I otherwise would have.

I’ve found disputing credit card charges to be pretty painless, as the credit card issuer usually cancels the card and sends me a replacement in a couple of days. And the credit card companies typically notify me if they suspect fraudulent charges; it’s their money being stolen, after all. A bank may not have the same incentive on a debit card, as it’s your money the thief is spending.