The million dollar question everyone including myself have an opinion on. Here is my two cents.
When you have the option to use debit or credit, you're
probably using a debit card, or a card issued by a bank, backed by your
checking account, but also with a Visa or MasterCard logo on it. Depending on
what you pick, different things happen when the payment is processed:
When you select debit: You enter your PIN and the funds are
deducted from your bank account immediately. If they're unavailable, the bank
has the option—depending on your agreement with them—to pay the charge and hit
you with an insufficient funds fee, or to decline the charge. To the merchant,
this transaction is as close to cash as you can get without using bills and
coins, and offers them more forgiving transaction fees than credit cards.
When you select credit: The transaction requires a
signature, and is processed by the credit card company. The funds may or may
not be immediately deducted from your bank account, depending on how the
retailer handles their transactions. Some stores "batch" their credit
transactions and send them in at the end of the day. Depending on the bank,
using credit instead of debit can offer you some anti-fraud protection that
credit cards offer (more on that a little later). This isn't universal though,
so you should check with your bank to be sure. Finally, to the merchant,
processing a transaction as credit usually involves a credit card transaction
fee to the major issuers, like Visa and MasterCard.
If you are shopping in a small business or a locally owned
shop, you may want to use your card as debit (or just pay with cash) instead of
credit so they don't have to get hit with that credit processing fee. At the
same time however, signing for your purchase as credit can give you some of the
anti-fraud protection and delay the charge hitting your account—depending on
the bank. Wells Fargo Bank, for example, considers debit transactions "online"
and deducts them immediately, while credit transactions are "offline"
and offer protection by Visa before they're processed.
There are pros and cons to each, and now that you know the
difference at the cash register, let's talk about when you should use credit
cards (or tap credit) and when you should go for debit instead.
When You Should Debit Cards or Credit Cards for Your
Purchases
Debit and credit are handled differently when it's time to
make the purchase, but before you even get to the register or click "check
out" when you're shopping online, there are more differences you should be
aware of. To be up-front, in almost all cases there are benefits to using
credit cards that debit or cash simply don't provide, but you have to decide
whether or not those benefits are worth using a credit card (and accepting the
financial issues that come with it; eg. debt, interest, etc). Here's how to
tell when you're better off using which:
When Credit Is the Best Option
If you're shopping online. Credit cards are by far your safest option when shopping
online, both because the credit card issuers watch for fraudulent
charges. If you detect fraud yourself you can dispute a charge and get it
reversed quickly, thanks to credit card issuers' "zero liability"
policies. You're never liable for unauthorized charges, unlike debit
transactions, which are the same as cash (and are protected in some cases, but
that varies from bank to bank).
If you're making large purchases or electronics purchases.
Most credit cards offer their own warranty protection
for your purchases just for using a credit card for the transaction. Some of
those warranties go beyond what's offered by the manufacturer, and offer you extra
coverage, which is really useful for electronics, appliances, or other large
purchases. Of course, before you buy, read up on the manufacturer's warranty
and the return policy of the store.
If you're traveling or are on vacation. If you're away from
home, the added anti-fraud protection offered by credit cards can be essential
if someone steals your card number or you accidentally use a shady ATM in some
tourist trap, designed to harvest card data. With a credit card, you can put a
stop to it without being liable for the charges (if the credit card company
doesn't detect it first). Similarly, using your card for travel may open up
perks to you, like discounts on rental cars, frequent flyer miles,
or cash back on purchases. Finally, many hotels, airlines, and other travel
companies only use credit cards for reservations and bookings. If you use
debit, they may put a massive hold on your account, which can be inconvenient
if you need to spend your money.
Our friends at Credit Karma have some more cases where credit beats out debit, like when you're
using a rewards card or a card that offers you perks for purchases, and if
you're trying to repair your credit after bankruptcy or foreclosure.
However, in both of those cases (and all others, frankly),
you should be sure that the financial risks associated with credit cards are
worth the benefits you'll get. A few hundred points won't make much difference
if you're carrying interest on a pair of movie tickets. Make sure you pay off
those credit cards at the end of the month every month, or at least pay off the
transactions you charge up in order to get your rewards.
When Debit Is the Best Option
If the other party needs to be paid immediately. Since debit
transactions are handled almost instantaneously, they're also the fastest
method of payment. If you're swiping your card and speed is an issue, debit is
the best option.
When you've automated your finances and
are on a budget. The beauty of automating your finances is that you can carry a
debit card that's specifically for your personal or luxury purchases. You can
use it as much as you like, as long as you're within your budget, and if you go
out of your budget, that's it—the card won't work anymore. Bright side: you
won't incur overdraft fees, and you won't pay interest on the drinks you had at
the bar on Friday night, which overall will keep you better financial health.
If you're watching your finances, or recovering from poor
money management habits. Credit cards aren't for everyone. They're a tool—a
powerful tool—but like any tool, they're good for some people and bad for
others. If you have a hard time managing your money or living within your
means, you may be better off leaving the credit card at home entirely and
finding a bank that offers a zero liability policy on your debit account, so
you're protected from fraudulent transactions. That way you can budget, spend
only what you have, and still be protected in case someone steals your card
number and PIN.
If you want the best exchange rate on foreign currency.
Credit cards can be better for flat transactions abroad, but if you need actual
currency in a country that's not your own, your best bet is to use your debit card and hit the ATM.
When you do, you generally get the "wholesale" exchange rate, which
is reserved for interbank purchases, and superior to the exchange rate you'd
get on your account statement if you just swiped your plastic.
We have to point out again that since debit is essentially
the same as cash, you have to check with your bank to make sure you have
anti-fraud protection, and any transactions you don't authorize or want to
dispute will be refunded to you. Many banks only offer zero liability policies
if you swipe your debit card like credit—if you don't, it's same as cash, and
if you're double-billed for example, you have to contact the retailer to get it
straightened out (which can suck if you were traveling or the retailer was a
bar or restaurant), or file a lengthy dispute—during which you're out the money
you're arguing over.
Depending on the circumstances, credit can be a much more
powerful and flexible option than debit. You're protected from identity theft,
your purchases can be protected from defects and failures, and disputes are
handled quickly without you having to pay up just to get your money back.
However, credit cards are still credit, and you're in debt for the purchases
you make. You pay interest on them, and not being able to handle your credit
wisely can lead to serious financial problems. Sometimes it can be better to
not spend at all unless you have the money to spend—in which case debit (and
cash) are better options.
In either case, choose the option that's best for you in the
situation's we've described. Think carefully about how you manage your money,
and how well you handle credit. The answer for you may not be the answer for
someone else—but at least you'll know the answer.
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