How Debit Cards Compare with Credit Cards

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How Debit Cards Compare with Credit Cards

Their ease of use has helped make debit cards more and more popular every year. Like every popular product, there are downsides that can affect you if you are not careful. Let’s look at the pros and cons of debit cards and how they compare with credit cards.

Advantages

• Debit cards are easier to obtain than credit cards. This is an advantage to those who have difficulty getting credit cards.
• Debit cards finalize transactions on the spot. You don’t get a bill sometime later.
• Having the money come out of your account right away can put a damper on overspending.
• You can’t run up balances like you can with a credit card.
• You don’t need to present identification when using your debit card.
• Less scrutiny is required of debit cards than personal checks.
• It generally costs less to get cash from a debit card than from a credit card (user fees may still apply, though). There are no finance or interest charges as there are for credit cards.
• Overdrafts may be prohibited, which can protect undisciplined spenders.

Disadvantages

• Payment is on the spot. Although this is an advantage to some, others prefer having a few weeks to pay their bills.
• Large purchases can drain your account. Credit cards won’t do this.
• You are limited to the amount of funds in your designated account. If you spend more than is in your account, you may be charged an overdraft fee. This is contingent upon your authorization, however, due to recent legislation. Depending on how you view your discipline, this could even be an advantage for you.
• There can be a whole host of fees other than point-of-purchase fees. There may be fees just for having the card, fees for not using the card, ATM fees, activation fees, and various customer service fees. If you do not plan well, they can eat a big hole in your balance.
• If you do not authorize overdrafts, then your ability to spend money is limited to what is in your account.
• Protection against unauthorized use of your debit card is limited, compared to that of a credit card. Liability is limited to $50 if you report it within two business days, but $500 if you notify your institution within 2–60 days.
• No right to withhold payment in the event of a dispute with the merchant.
• There is no ability to place a "stop payment" on a transaction.
• If your final bill for a service is uncertain, such as at a hotel where you could run up a room service tab, a debit card may be an unwise choice. The hotel could put a hold on your account for the room rate plus an estimate for additional expenses. This hold could put you at risk for overdrafts.
• Debit cards don’t typically provide extended warranties, and some credit cards do.

One idea for dealing with the cons: set up a separate account just for debit purchases. Don’t link this account to any others.