September 11, 2009

Credit Cards versus Debit Cards

BadMoneyAdvice recently wrote My Debit Card Confusion about how he is mystified that so many people use debit cards rather than credit cards. He cited an article that said that 50% of transactions are done with debit cards and that their use is on the rise. Personally I use a credit card for almost all of my spending. I put everything I can on my credit card. I do this because I get 1% or more cash back on all my purchases. At the end of the year this should add up to a few hundred dollars. But keep in mind that I pay off my bill every month.

Here's my opinion on whether credit or debit is better:

If you carry a credit card balance or have difficulty avoiding going into debt with credit cards then a debit card is probably your better option.

If you pay off your credit card every month and don't have difficulty over spending then a good rewards credit card is a better choice.

Looking at credit cards versus debit cards they each have different benefits and draw backs.

Benefits of Credit Cards

You get to use the banks money for 1 month
Good rewards programs with 1-2% cash back incentives
Convenience of one bill at end of month
More protections against identity theft
Improves your credit score
Purchase protections
Possible warranty extensions

Downsides of Credit Cards
Its borrowed money
High interest rates if you don't pay off balance
Its an additional bill to pay


Benefits of Debit Cards
Its cash money
No extra bill to pay
No worry of accumulating debt or paying interest

Downsides of Debit Cards
Higher risk of losing money from ID theft
Risking hefty overdraft fees if you spend more than account balance


If you pay off your bill every month then the benefits of credit cards outweigh their drawbacks and credit cards are more beneficial than debit cards.

2 comments:

  1. I think you forgot the two more big advantages for credit cards.

    One, ability to charge-back, in case there is an issue and you can't resolve it with the merchant (with the debit card, your money is already gone and there's little that can be done by the bank, not that they would try; with the credit card, you haven't paid the credit card company yet so the credit card company is generally on your side in the charge-back dispute, and they can more or less unilaterally impose charge-back on the merchant, and they are happy to do it (after checking that the complaint is legit) because charge-backs actually makes them money through some fine to the merchant).

    Two, warranty extension program that a lot of credit cards have. I don't know of any debit cards that have a similar program.

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  2. Byung,

    Good catch, I did forget about those 2 items. I've added them to the list for credit card benefits. Thanks
    Jim

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