To Debit or Not to Debit: Is a Debit Card Better Than a Credit Card?

There are two other types of debit cards. "On-Line" Debit Cards are called ATM cards with a purchase feature. You can purchase things with an on-line debit card. Your purchase is subtracted right away from your checking account. When you are at a store terminal, you must punch in your PIN number, as you would at an ATM. "Off-Line" Debit Cards look like credit card, but the merchant's terminal reads your card and identifies it as a debit card rather than a credit card. When no PIN number is used, you may have to sign the receipt as you would for a credit card purchase. Your purchases are subtracted from your bank account within 2 to 3 days.

Debit Card or Credit Card?

What's the difference between a debit card and a credit card?

While a debit card looks like a credit card, it works like cash or a personal check. You "pay now." With a credit card, you "pay later."

Debit means "subtract." When you use a debit card, you subtract money from your own checking or savings account. As with credit cards, you use it in stores for purchases. At check-out, the card reader electronically contacts your bank and subtracts the amount from your account. The money you have in your bank account limits how much you can spend.

Using a credit card is somewhat like taking out a loan from a bank or other financial institution. You have to pay back the credit you used each month. If you pay back less than the full amount you owe each month, you pay interest on the amount you don't pay back. The credit card company sets the total amount you can charge based on your credit history, income, debts and ability to pay.

Some cards are dual-purpose credit/debit cards. Before you swipe the card through the reader, you select a "credit" or "debit" button on the reader. If you select "debit," you then enter your Personal Identification Number (PIN).

If you select "credit," you are given a credit receipt to sign. "Credit" charges will appear on your next charge account bill.

What are the advantages of a debit card?

It is often easier to get than a credit card.

You don't have to get your check approved or show identification at stores.

You don't have to carry cash, a checkbook or traveler's checks.

Debit cards are more readily accepted than checks, especially when you are traveling.

You don't pay interest charges.

Because checkout lines move faster, storeowners like debit cards. They don't worry about bounced checks or take checks or cash to the bank. Debit card processing fees for the merchant are generally lower than credit card fees.

What are the disadvantages of a debit card?

You need enough money in your bank account to cover each purchase.

Since you paid for the purchase at checkout and the money is out of your account, you have less protection if something goes wrong with the purchase.

Your bank won't put money back into your account for items that are never delivered, don't work or were misrepresented.

You may have bank fees - such as monthly service charges, per-transaction costs or penalties - for dropping below your required minimum balance. Check with your bank to find out those extra costs.

Debit cards don't have the same protections from unauthorized use as credit cards. Under federal regulations, you're liable for up to $50 if you report a lost debit card within 2 days of the discovery. If you don't report the lost or stolen card within 60 days after a statement listing the fraudulent transaction is mailed to you and you could be liable for all of your losses. Credit card companies only hold you liable for a maximum of $50, but Visa and MasterCard have extended their credit card zero-liability protection to debit cards carrrying their logos.

If you have a Visa debit card you could be held liable for all charges if the card issuer, Visa determines that the fraud is due to the cardholder's negligence or if the transaction was not processed by the Visa network. MasterCard protection does not apply if your account is past due or if you have reported two or more "unauthorized events" in the previous year.

To limit fraud exposure consider going with a PIN-only card. Crooks can easily fool cashiers with your stolen card and a forged signature. If lost or stolen, signature-capable debit cards leave you more vulnerable to fraud, especially on the Internet where merchants cannot verify signatures. Washington Mutual and Comerica offer safer PIN-only debit cards, but signature verification cards are accepted at 20 million retails locations whereas only 1.6 million U.S. stores have keypads for PIN-only cards.

Debit Rewards:

Many companies offer reward programs to encourage consumers to use their debit cards. Many times there are fees for these programs; Key Bank features a Continental OnePass Debit Card with an annual fee of $65. Consider if the fee is worth the reward, many times it is not. Don't choose your bank of debit card based on rewards. It can take you years to rack up points for rewards. Additionally retailers are complaining about being charged with fees for these transactions and Congress is investigating, so these programs might not be around long enough for you to cash in your rewards. Many card companies and airline affiliated debit cards reserve the right to cancel the rewards program at any time.

Beware of hidden fees. Typically, networks for processing debit payments do not allow merchants to tack extra fees onto purchases, but some do. Complain to the store manager, cancel the sale if the fee is not waived, buy elsewhere in the future, and complain directly to the card issuer.