Should I use a debit card or a credit card?

Being informed and confident about your payment options helps you become and remain financially healthy.

Should I use a debit card or a credit card?

What is a better form of payment – a debit card or a credit card? Jinnifer Ortquist, Extension Educator with Michigan State University Extension says it depends. Using a credit card generally offers more purchase protections than a debit card. Federal law limits your losses to a maximum of $50 if your credit card is lost or stolen, although industry practices may further limit your losses. But you have to report your loss, in writing, to your credit card company within 60 days of the fraud occurring.

Your liability limit for a debit card purchase you did not make is $50 if you notify the bank within two business days of losing the card or noticing an unauthorized transaction, and could be up to $500 or even more if you wait longer. Banks generally have up to 10 business days to resolve or provide provisional credit for the amount of an alleged transaction error.

Whatever form of payment you choose, just be sure you understand how yours works and you are confident it’s the best option for you.

 

Debit Cards

Credit Cards

Payments

  • Buy now, pay now.
  • Buy now, pay later.

Interest Charges

  • No charges apply as funds are automatically debited from your checking account.
  • Charges will apply if you carry a balance or your card offers no grace period and you incur interest charges.

Fees

  • Fees on certain transactions (e.g., an ATM fee charged for withdrawing funds from an ATM not operated by the bank that issued your debit card).
  • Potentially costly fees if you try to spend more money than available in your account.
  • Fees and penalties can be imposed if payments are not timely.
  • Some cards also have annual fees.
  • Not all cards offer grace periods (time to repay without incurring interest charges).

Other Potential Benefits

  • Easier and faster than writing a check.
  • No risk of losing cash that you cannot replace.
  • Some cards may offer freebies or rebates.
  • As long as you do not overdraw your account, debit cards are a good way to pay for purchases without borrowing money and paying interest. Card can be set up to prevent overdrafts.
  • Freebies sometimes offered (e.g., cash rebates, bonus points, or travel deals).
  • You can withhold payment on charges in dispute.
  • Purchase protections offered by some cards for faulty goods.
  • If you manage your credit card carefully, your credit score may go up and you may qualify for lower interest rates on loans.
  • Provides an opportunity to begin establishing good credit, as long as the company reports to the credit bureaus.
  • Enables you to make secure Internet purchases.

Other Potential Concerns

  • Usually there are no protections against faulty goods and services.
  • You need another way to pay for unexpected emergencies (e.g., car repairs) if you do not have enough money in your bank accounts.
  • Not the recommended choice to be used to shop online due to a high risk of not being secure.
  • Over-spending can occur, since the credit limit may be higher than you can afford.
  • If you do not pay your card balance in full each month, or your card does not have an interest-free grace period, you will pay interest. This can be costly, especially if you only pay at or near the minimum amount due each month.
  • You may be tempted to spend more than you can afford in order to meet reward limits.

Source: Federal Deposit Insurance Corporation, Money Smart Program, 2014

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