What’s best – credit or debit cards?

With cash and cheque books becoming less popular, more and more of us are using debit and credit cards to handle our financial transactions. Naturally, they are quite different, but what are the advantages and disadvantages of each type?

Firstly though, here’s an overview of each type:

Credit Cards

Standard Credit Cards:

They are a revolving line of credit, usually tied to a bank, credit company or credit institution, like a credit union. When you use a credit card, you aren’t paying money directly to a seller, you are borrowing money on credit from a third party – the company that issued you the credit card.

One useful advantage of a credit card is you aren’t limited by how much money you might have in your bank account. Your card will have credit limit, so if your card has, say, a $2000 limit, you have access to a $2000 revolving line of credit available.

However, if you have acquired a good credit history, the credit card issuer is likely to offer you an increasingly higher limit over time.

Premium Cards:

Often called Gold, Platinum or Black, these cards are available to those with high salaries and a good credit history. The advantage they offer is a high credit limit.

Charge Cards:

Another type of credit card is the Charge Card. This would typically not have a pre-set limit, but the full amount owed must usually be paid in full each month.

Secured Credit Cards:

Credit Cards can be difficult to obtain when you have a bad credit rating, therefore one option is what’s called a Secured Credit Card. The user is required to deposit an amount of money to establish a line of credit and will then be allowed to borrow a percentage of that sum.

This pay-as-you-go system is designed to allow anyone with a poor credit rating to re-establish a good credit rating.

Rewards Cards

There are a number of different types of Rewards Cards available, although all of them are designed to encourage you to spend more in some way. To achieve this, these cards offer points, travel ‘miles,’ discounts and cash, although it’s important to be aware of the annual fee that accompanies the Rewards Card.

Debit Cards

A Debit Card operates completely differently to a Credit Card because there’s no line of credit available. Essentially, they allow the user to make financial transactions without having to carry cash, or needing to write a cheque (not that many are written anymore). A Debit Card only allows you to spend the money you have in your Cheque Account and, if you overspend, you are likely to receive an overdraft charge.

Naturally, you don’t need a good credit history to obtain a Debit Card and they are available from the bank or credit union where you have an account.

How Do Credit Cards Compare With Debit Charge?

Credit Cards – Good News:

• You have access to a line of credit when you need it
• Convenience – don’t have to carry cash
• Can provide easy access to funds when travelling
• Make online shopping easy
• Good security – protected by your personal PIN No.
• Fraud – the user isn’t liable if there is fraudulent activity on your card
• Rewards programs can offer attractive bonuses if cards are repaid on time
• Good credit rating can lower your mortgage and insurance costs, plus potential higher credit limits
• Some purchases can be interest free if repaid within set period
• They can provide an additional warranty on purchases, even beyond a product warranty in some cases
• Allow user to dispute lost, broken or undeceived goods.

Credit Cards – Bad News:

• Can attract high monthly fees, especially if payments are overdue
• Easy access to credit means it’s easy to over-spend and rack up debts
• A poor credit rating can make it hard to get a mortgage, or another credit card, in the future
• Not all cards accepted by sellers
• Application Process can be difficult depending on your credit history
• Some cards restrict spending limits
• Poor security if not PIN protected
• Expensive foreign exchange rates.

Debit Cards – Good News:

• Convenient to use anytime
• Can transfer funds immediately
• No monthly fees or late charges
• Encourages responsible spending and budget control
• Accepted by almost all retailers
• Easy to apply for
• Not dependant on good credit rating
• Better exchange rates than credit cards when travelling.

Debit Cards – Bad News:

• • No line of credit
  • Limited by the money you have available
  • Overdraft fees do apply
  • Don’t improve your credit rating
  • No rewards programs available
  • No buyer protection on purchases
  • Less legal/fraud protection than credit cards.

Conclusions

Other than the fact that they are both made of plastic and give you easy access to money, Credit Cards and Debit Cards are very different.

In summary, Credit Cards offer huge flexibility and convenience for your financial transactions as long as you are very aware of the costs that can be incurred and potential debt problems. Debit Cards are a convenient, but far less versatile and limited way to make financial transactions, although they do encourage responsible spending at all times.