Wednesday, October 15, 2008

Debit Cards vs. Credit Cards

Credit or debit? That question will sound familiar to anyone who has presented their credit card or debit card when making an in-store purchase. But before you even get to the register, you should ask yourself that very same question in order to decide if you want a debit card or credit card in your wallet.

Current data suggests that debit cards are more popular with consumers than credit cards. A recent TNS Financial Services Consumer Credit Card Program Study indicated that over 60% of consumers prefer using debit cards to credit cards as a payment vehicle, because debit feels more like "real money."

TNS reported that between 2002 and 2005, the number of households using an ATM or debit card grew from 47% to 60%. Additionally, debit card transactions now make up the same value of in-store purchases as cash (each around 33% of total transactions), according to the 2005/2006 Consumer Payment Preferences study from the American Bankers Association and Dove Consulting. While cash payments have remained steady at 33% since 2001, debit card use has grown from 21% of in-store purchases that same year. Meanwhile, credit card use dipped from 21% of in-store purchases in 2001 to 19% in 2005.

Debit cards are also gaining favor as a form of online payment. Based on data from JupiterResearch in American Banker, debit cards will account for 46% of all online purchases by 2010, compared to 41% in 2006. The same data forecasts a slide in credit card use to 35% of all online purchases in 2010 from 41% in 2006.

There are reasons that debit cards have become the plastic of choice for many consumers. Debit card payments come out of a checking account immediately, alleviating concerns over credit card bills and interest rates. Since debit cards are linked to a checking account, they can limit purchases to items cardholders are able to pay for at that moment, unlike credit cards. As such, debit cards may be a good option for those Americans that are carrying a debt load. But be careful not too overspend on a debit card, also, as doing so could produce a nasty insufficient funds fee. Separately, using a debit card with overdraft protection means that debit charges can be paid out of your savings account or a home equity line of credit when your account becomes overdrawn.

Also, skillful debit card users enjoy low-to-no cost for paying with their plastic. The majority of institutions do not charge for debit card transactions, making paying with one a no-cost way to practice some financial discipline.

However, debit cards are not superior to credit cards in all respects. Consumers without a debt burden who pay their balance in full each month can benefit from up to 40 days of free float, or the time between when a purchase is made and when you actually pay your bill. With debit cards, the money is withdrawn from your account almost instantly.

And, that immediate withdrawal with a debit card is the reason credit cards offer greater protection for consumers. With a credit card, you have the option of withholding payment should you be unsatisfied with the quality of a purchase. But when paying by debit card, there is a good chance the merchant already has your money by the time you realize something is wrong with the purchase.

The law is on your side when it comes to credit card purchases. The Fair Credit Billing Act basically means you have zero liability for fraudulent purchases, poor-quality or damaged merchandise, or for merchandise that was never delivered. Also, credit card users are not required to pay any amount that may be in dispute, meaning the cardholder retains use of the fund for the amount in question until the issue is resolved. While policies have changed in favor of debit card transactions (providing greater protection and in many cases zero liability), you still don’t have the degree of consumer protection with a PIN-based card as you do with a credit card. The zero liability provided on debit cards is only a policy and therefore can change at any time, like interest rates and fees.

In the event of a debit card theft, the victim may only find out after the money has been withdrawn from the account. Should you be aware that your debit card is lost or stolen, you can take action. The Electronic Fund Transfer Act gives you the right to dispute an error on your bank statement and gives you some protections. For unauthorized card purchases, your liability is capped at $50 if you notify your bank within two days of realizing your debit card is missing. But between two days and 60 days, you could be responsible for paying up to $500 of a crook’s spending spree. If you wait more than 60 days to contact the bank, you will be stuck paying every cent of the unauthorized charges, which could cause you to lose everything in your checking and overdraft accounts.

While debit cards are increasingly being used by consumers, there are still a number of ways in which credit cards remain superior. Due to more limited consumer protections, a debit card may be best used for making smaller, routine purchases such as gas or groceries (although several rewards credit cards offer 5% cash back for these purchase categories).

Paying by debit is quick and easy, and will not result in you paying any interest. However, as mentioned earlier, debit card users do not experience the float enjoyed when making a check or credit card payment. When making debit card payments for large purchases, it is best to do so at a store that allows you to thoroughly inspect the merchandise before buying. Also, large purchases may need to go on your credit card due to the fact some debit cards carry a maximum daily spending limit. Finally, credit cards remain preferable for ordering merchandise over the phone or the Internet, as they allow the consumer greater recourse in case something goes wrong.

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