Credit or Debit or Both? (Oh My!)
Debit cards have been in the news lately, and not in a flattering way. By all accounts, you may soon be paying for the use of your card. Bank of America and SunTrust have announced they’ll charge customers who use debit cards (certain customers who carry high balances or have a mortgage with the bank are excluded) but other banks (Wells Fargo and Chase are both testing similar fees) are likely to follow. When everything shakes out, it could end up costing consumers $5 a month.
The irony is that while debit cards are getting pricier for consumers, credit cards are becoming more attractive. They’re offering sign-up bonuses are hard to resist – 50,000 extra miles, $300 if you spend a certain amount of money in the first three months – as well as ongoing rewards programs are getting more robust as well.
The message is clear: Banks are trying to shift customers from debit to credit.
Why? Because recent legislation limited the amount that big banks – those with more than $10 billion in assets — can charge retailers for swiping your debit card, but not your credit card. But while credit cards are better for your bank’s bottom line, the real question is what’s better for yours? Both forms of plastic have pros and cons.
Pros and Cons of Debit Cards
Pros: You’re spending your own money, which means you’re forced to live within your means. You don’t have to worry about paying interest. People tend to spend less when using a debit card than when using a credit card (the same, by the way, goes for cash: If you use cash, you’ll spend less than you would with a debit card. And if you keep large bills in your wallet, you’ll spend even less). And you’ll have no bills to pay, which means no late fees.
Cons: There are limited reward programs. Overdraft fees can add up and add up fast. You can eliminate this issue by not opting into the overdraft protection. If someone steals your card, you likely won’t be liable for the purchases they make, but you’ll have to jump through a few administrative hoops to get your money back, which may leave you in a bind for a few days or even a week. Account blocking (the practice in hotels, for example, of putting a certain amount of money on hold just in case you spend it) can cause you to overdraw. And of course you may face new fees associated with their use.
Pros and Cons of Credit Cards
Pros: They help you build up a credit history so you can take out additional loans when the time comes. Rewards are compelling, but may cause you to spend more. If you’re legitimately dissatisfied with a purchase or service, and you paid by credit card, your issuer will often stand behind you and you can withhold payment. And you have more protection in the event of theft and fraud, because your money isn’t being spent. You don’t have to worry about not having access to your funds while the bank sorts things out.
Cons: Interest. This is a biggie and there’s no getting around it. If you don’t pay your balance off every month, you’ll pay for it. Late fees are also an issue. If you don’t make your payment on time you’ll pay a hefty fee and damage your credit score. And consumers spend more on credit cards than they do using debit cards or cash. It doesn’t feel like “real” money.
So what’s the answer?
That depends on your end goal. If you’re looking to build a credit history, you have to have a credit card, and you have to use it. If you’re trying to keep a lid on your spending or have had trouble with credit cards in the past, debit is the better option. And note: Just because fees are coming doesn’t mean you have to pay them. Smaller banks and credit unions tend to be fee freer (if not fee free) zones.