Credit Cards vs. Debit Cards

In a world where plastic is used almost as often, and sometimes more often, than paper and coins, credit and debit cards are fast replacing cash and checks as the way to purchase new items. Once reserved only for those with good credit or high incomes, credit cards are more available than ever before, and debit cards are available without any credit checks whatsoever. So what are the differences between the two, and which is the right choice for you? This article will explore some of the pros and cons of both credit and debit cards.

Overview - Credit vs. Debit

Credit cards offer flexible spending options, allowing you to purchase items or receive cash advances on credit, meaning that the credit card company, or the issuing bank, will front the money to you or the retailer, up to the amount of extended credit for which you are approved. This is great if you need to make a major purchase or have run a bit short on cash for the month and need to essentially borrow the money from yourself.

The downside is that you have to pay the money back, of course, but there is also the issue of interest. Many credit cards do offer a no interest grace period. That is, if you pay the bill in full by the due date, or sometimes within a specified period of time (i.e. 25-30 days, depending on the cardholder agreement) you will not have to pay any interest. However, if you do not pay it back within this time frame, the balance you carry on your card will accrue interest. Sometimes these interest rates can be extremely high (up to 30% for some cards.)

Debit cards, on the other hand, don't have a flexible spending option. With a debit card, you must place money on your account, and then when you use your debit card, the amount of your purchase is deducted from your account, with no interest, and since it's your money, you don't have to pay it back. However, you can only spend up to the amount you have placed on your account.

Both debit and credit cards can charge an annual fee. Credit cards usually do this the first year that you own the card, and sometimes, if you have good credit and carry at least a small balance every month, you can request to waive the annual fee. If your debit card is based off your checking account, many banks don't charge an annual fee. If, however, you acquire a debit card account without an associated checking account, the issuing card provider may charge an annual fee for maintaining your account.

Both credit and debit cards can charge fees if you go over your limit. For a credit card, your limit will be whatever the preset line of credit that the bank has extended to you, and for a debit card, it will be the actual amount you have deposited into your account.

The downfall to both credit and debit cards when you go over your limit is the exorbitant fees that can be assessed when this happens. If one transaction fails to clear on your debit card or goes over your limit on your credit card, the fees can be anywhere from $15-$45 dollars, depending on what the laws in your state are and what your cardholder service agreement states. These fees can add up very quickly and exhaust you credit line or balance of funds.

Another thing credit and debit cards have in common is the issuer. In the past, banks often would issue ATM cards along with your bank account. These ATM cards could only be used at approved ATMs that did business with your bank. These cards rarely could be used at retailers. Recently, however, most debit cards now carry a VISA or MasterCard logo on them, and they are accepted at most retailers the same way a credit card would be accepted. In fact, the retailer rarely knows if the card is a credit or debit card, because both cards can be processed as credit or debit through the payment processing machines.

That being said, there is in important distinction to consider when choosing between a credit or a debit card. While debit cards now carry major credit card logos and can be used as credit cards for most things, using a debit card as a deposit on a rental car or other item is not always possible, or if it is possible, you have to have a large amount of money deposited on the account.

For example, I was traveling in Alaska a couple of years ago and we decided to rent a car. The rental company required a credit card in order to rent the car. In order to use my credit card, all they had to do was authorize the card. For my debit card, however, they had to put a hold on my account in the amount of $300.00. Now, it was only going to cost us a little under $40.00 to rent the car, but when they authorized my card, it was authorized for $340.00.

When we returned the vehicle, they then issued a credit to my debit card for the $300.00 hold they had placed on it. We were told it would take 3-5 business days for that amount to be credited to the account. Fortunately for us, we had enough money on the card and cash in hand to afford this, but had we been low on cash at the time, this could have crippled our spending for the rest of the trip.

After doing some research, we found that when using a debit card to hold or make a deposit on a service or rental like this, that this is standard practice. If you plan to use your debit card for deposits like this, be sure you have enough other money to work with for 3-5 days while waiting for the credit.

For people with bad credit, recovering from a bankruptcy, or trying to build a better credit rating, a debit card is the definitely one way to go, giving you the power of a credit card without concern with the interest, over the limit fees, and late fees. However, a debit card is limited in using it for deposits and you can only spend as much money as you actually have.

The advice of most financial experts on the web is this: Use a debit card for most of you transactions, so you do not get hit with high interest fees, but keep one credit card for emergencies and deposits, and then use it only for those emergencies!

The best bet for a debit card is to contact your bank or financial institution and see if they offer a free debit card that is associated with your checking or savings account. If this is not an option available to you or you do not have a checking or savings account, you can find other reputable companies who provide non-checking account debit cards where you load or charge up the card. First Vineyard has an excellent debit card program where you can even earn money on your purchases and invite friends to sign up and earn from their purchases as well. You can reach their site at http://www.firstvineyard.com/.