Financial Tip: Debit vs. Credit

Debit card. Credit card. If you are reading this post, then the chance is that you already what each one does, and how it differs. But, how much better is one than the other? Let's take a look at some analysis:


Deduction Method

• Debit - Deducted from your bank account. Based on how you paid, the deduction could come after three days later.
• Credit - The payment is made through a monthly statement bill. There is an interest rate on any unpaid amount.
  

Opinion: Tie. You still have to pay either way.


Spending Limitation

• Debit - The amount in the checking account linked to the debit card. Usually there is an option to link a checking account to another bank account, so any over spending can be withdrawn from the secondary account. However, if not, then any over spending will result in an overdraft fee.
• Credit - The amount of credit on the card. Over spending will result in an overdraft fee.

Opinion: Debit. Fee is never a good thing.


Transaction Fee

• Debit - The bank may charge you. It depends on the term of the card.
• Credit - The bank charges the merchant, and not the consumer.

Opinion: Credit. There is absolutely no reason to pay more.


Annual Fee

• Debit - Depend on the term. Maybe up to $30 per year.
• Credit - Depend on the term. Currently, most credit card doesn't have annual fee.

Opinion: Tie. The lesson is look at the term before signing up for anything.


Liability (Stolen)

• Debit - If the card is report stolen within the first 48 hours, the maximum liability is $50. After 48 hours, it is $500. After 60 days, it's all the money in the checking account PLUS the maximum overdraft line of credit.
• Credit - If the card has been fraudulently used, the liability is only $50.

Opinion: Credit all the way. With a debit card, the money is already deducted from your account, so you know the refund won't be any time soon. With a credit card, no money is given to the bank until it is settled.


Benefits

• Debit - Some debit cards can be used as an ATM card. Some cards offer reward program. No payment late fee.
• Credit - Offer much better reward programs.

Opinion: Tie. However, if you pay the credit card bill on time, then credit would be a better choice.


Winner: Credit card.

The only thing that required you to do with credit card is to make the payment on time every month. If you can keep this up, you open yourself to a better reward program, save yourself from some hidden transaction fee, build your credit for a new car or a house, and a better protection again a fraudulently used of your card. Especially with an online transaction, you are much better protected with a credit card than a debit card.

In addition, many major bank companies are offering an online account to your credit card with several security features. The optional features included an email alert for buying a big tag item, for having the credit above certain amount, for reviewing previous statements, etc.

In the end, maybe credit or debit is not the solution. For those who want to save money, the best solution is to use real hard cash. This way, it is guarantee that you will never over spend any money you don't have.

Links:
* MSN-BankRate: Debit cards: A good deal gets better
* Debit-Card Identity Theft on the Rise: Choose Credit, Not Debit, When Paying
* BankRate: Pay more, get more debit rewards