When checking out at a local store or online, chances are you’re asked whether or not you wish to complete the purchase using debit or credit. If you’re not truly sure of what the difference is, it can be very confusing to discern which option is best for you. What must be understood however is that there is a significant difference between debit card transactions and credit card transactions. Though they are both in the form of a plastic card, there are times in which one option may be more feasible than the other. Knowing the difference can help you in making a more informed decision about your personal finances and transactions going forward.
Aren’t They the Same Thing?
A common misconception for consumers is that debit and credit are essentially the same. The reason for this misconception is because debit cards often have the same logos as a credit card (Visa or MasterCard). Another reason is because some card holders (such as those with bank cards), have the option to swipe their card as a credit or debit transaction. Since its coming from the same institution, it leads the consumer to believe there is no difference – however, this is not the case. The major difference between credit and debit cards is the way in which transactions are processed.
Paying with Debit – When you opt to pay using the debit card, you are required to enter a PIN (personal identification number). Once this number is entered, the total amount of the transaction is automatically deducted from your account. Debit card transactions are basically a cash payment in plastic form.
Paying with Credit – If you’ve opted for the credit card transaction, this will ultimately require you to sign a merchant receipt. Credit payments typically are not immediately deducted from your credit account as the transaction will need to be processed by the appointed credit card company. Depending on the type of credit card you have and the agreement you’ve signed, you may also be assessed a processing fee by the credit card company.
Which Option is Best?
Now that you understand how each transaction is handled, it will be up to you to determine whether using debit over credit makes sense. There are certain instances in which paying with credit provides more protection than paying by debit card. Below are afew circumstances in which it is best to use either debit or credit for your purchases.
When Credit Makes Sense
∙ Online Shopping – Because the internet often poses many vulnerabilities and risks to consumers, using a credit card may be your best option. Why? Well, credit card companies are on high alert for fraudulent transactions and as such will monitor your usage closely. If for some reason your information should be stolen by hackers and used at a later date, you’re able to dispute the charges and have it reversed at no charge to you.
Disputing Charges: If you’ve ever checked your credit report and noticed there was a credit card account in your name that you don’t recall opening, or some transactions that you didn’t authorize, you can also get help from sources outside your credit card company. Credit repair services can help you in resolving discrepancies such as inaccuracies or fraudulent accounts. The Facebook feed for Creditrepair.com gives expert advice on what to do if you’ve found errors on your report.
∙ Large Purchases – When you’re looking to purchase large ticket items such as television sets, washing machines, or other appliances, it may be beneficial to utilize your credit card. Many credit card companies have warranty protection options which can go above and beyond the manufacturer warranty. Review your credit card policy to determine what protections you have when making purchases such as those described above.
∙ Vacation Travel – Many credit cards have traveling perks that might include things like cash back, discounts on rental car services, or even frequent flyer miles which you can take advantage of. There is also the added coverage of antifraud protection. Should you lose your credit card, or should someone access your card information while traveling, you can contact the credit card company and put a stop to any transactions without penalty.
When Debit Makes Sense
∙ Need to Pay Instantly – Whether you’re in a rush, or you’re dealing with a merchant that prefers to be paid immediately, using your debit card is the best option. Since transactions resemble cash, the money will be immediately debited from your account.
∙ When You’re on a Budget – If you’re trying to stick to a budget, then you will be best served by using your debit card. This way, you can use what funds you have allotted on the account without the temptation of going over budget. There is also the fact that you won’t have to pay interest on purchases which could eat away at your budget each month.
∙ Just Getting Out of Debt – If you’ve just dug yourself out of a financial downfall, then chances are you should work on better money management habits. While having an emergency credit card on hand may be great for occasions when you don’t have the necessary funds, falling back into old habits could cause you to fall right back into debt. As such it might be best to stick with a debit card account.
∙ Foreign Currency Exchange Rates – Now if you’re looking to get some cash while traveling abroad, then you’ll probably fair best by using your debit card at an ATM. In most instances, when you use your debit card you will get a reasonable exchange rate. This gives you more money to use for shopping. As you can see, both debit and credit cards have pros and cons, and determining which method to use for payment is a decision that is really up to you. Credit likely offers the best protection when it comes to warranties, identity theft, and fraudulent transactions.
However, credit is still borrowed money, and if you don’t have the means to pay it back, it’s probably best to steer clear of this option. Since credit will require you to pay for the cost of the item as well as any interest, it will depend upon your personal finances and abilities to pay in a timely fashion.
Debit on the other hand is just like cash but in a more convenient manner. Most debit cards also have protections in place for fraudulent transactions as well. When making your decision, simply consider factors such as your ability to manage money, type of transaction, and your credit history. This should help you in making the best decision possible.