It’s time to talk to the man in the mirror: are you a credit card or a debit card type of guy (or gal)? Using plastic for transactions is inevitable in this day and age, so it’s important to take a hard look at your financial habits and make sure you are using the right type of card for your purchases.
Debit Cards—The Pros
A debit card withdraws funds directly from your bank account, which encourages responsible spending. You see your ledger account balance declining with each purchase, which offers an accurate (or sobering) picture of your spending habits.
Debit Cards—The Cons
If you do not keep a weather eye on your balance, you might overdraw your account. Most banks offer “overdraft protection” for debit card accounts, but this “protection” might come laden with interest charges and onerous fees. Be sure to read the fine print on your debit card agreement so you are aware of the bank’s policies on overdrafts.
Credit Cards—The Pros
If you are responsible in your use of credit cards—which means spending within your means and paying off credit cards completely each month—they can be better than debit cards in a few ways.
First, a credit card allows you to spend money you don’t have. I know this may sound like a slippery slope…but within reason, it’s justifiable. For example, if a major appliance is on sale early in the month, but you won’t be paid until the 15th, you can take advantage of the sale by using the bank’s money for the purchase. As long as you intend to pay off the balance at the end of the month, you come out ahead.
Second, many credit cards have great rewards programs. You can funnel all your expenses through your credit card, amassing loads of points that can be used for airline travel, free hotel stays, discount programs, or cash-back plans. As long as you still pay off your bill at the end of the month, you reap the rewards without losing anything.
Note, some excellect reward debit card programs are cropping up now, too.
Third, credit cards offer superior consumer protection. If your credit card is stolen, in most instances you will not be held responsible for the charges, save the first $50 (most issuers don’t even charge customers for this).
Read more on what to do if your credit card is stolen.
If you have a dispute with a vendor, the credit card company can withhold payment and mediate the complaint. This service is backed by Federal law, which empowers the credit card holder. Don’t recognize charges on your current credit card statement – here’s how to dispute a credit card charge.
When renting a car, many credit cards offer coverage for collision, loss of use, and towing charges. This can save you a bundle on car rental fees—just be sure to review the credit card company’s policy before declining or buying rental car insurance.
Credit Cards—The Cons
We are all familiar with stories of individuals and families struggling to overcome crushing credit card debt. We piled up a bit of debt ourselves a few years ago on excessive shopping, school tuition and related expenses.Fortunately, we kept our noses to the grindstone for a couple years and paid off our credit card and school debt.
Used irresponsibly, a credit card can blow up in your face like a personal finance grenade. Credit cards with high interest rates can turn inflate the costs of your purchases significantly as you pay for them over an extended period.
Be aware that credit card companies can raise your interest rate after your card has been issued. This practice has been reigned in somewhat by legislation enacted in mid-2010, but if you are late or miss a payment, the card issuer still has the ability to sock it to you. Check your monthly statements carefully to make sure your rate has not changed.
Self-Awareness Is the Key
Take an honest assessment of your spending habits, and then determine which card is best for you. In many cases a combination of credit and debit cards is the wisest choice, to maximize the benefits of each.