Paper or Plastic?
Credit or debit?
When I am in line at the store and the person ahead of me uses a debit card to pay for his or her merchandise, groceries, or whatever, I always wonder why. Read more below.
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Maybe it’s just me, but I find it a bit unsettling for a third-party, often a total stranger, to have direct access to my bank account.
I had a debit card for a while years ago; I think it was provided to me automatically by the bank when I opened a checking account. And I used it for a while. I gave it up when I realized that I had the tendency to forget to enter my debit card transactions in my checkbook register.
But I use credit cards extensively. There seem to be very few places that require cash these days. As a consequence I very seldom carry any cash, and if I do it is usually a token amount.
Let me explain why; a few somewhat frivolous reasons first, then some more serious ones.
My little ploy to get back at “the man” is that I rotate my cards so that I am always using the one whose billing period just closed. That way I maximize the float, the time between my spending the money and my actually having to pony up. And that is the first of a number of advantages a credit card has over a debit card. If you charge something at the beginning of the 30-day billing period, and if your card has a 25-day deadline for paying your bill, that is nearly two months’ free money. That may not seem like a big deal these days when you can earn only a fraction of a percent interest on a deposit, but it’s the principle of the thing. That’s the kind of guy I am.
But, on a large purchase, it might be nice to be able to postpone paying the piper and to manage your cash flow in this manner. Of course, if you are carrying a balance on your card, this strategy could backfire as a finance charge will be assessed against your average balance. There goes the free money!
One rationale I have heard for a debit card is avoiding the trouble of getting a bill, writing a check and sticking a stamp on an envelope every month. Of all the silly little things that irritate me, this one is not very high on the list. I actually like getting a bill and seeing what I am getting charged for. I suppose you can get the same information by scrutinizing your bank statement each month.
Postage has surely become more expensive, but I avoid that by paying my credit cards on-line. That may seem at odds with my objection to a third-party having access to my bank account, but I feel comfortable enough with the transaction being between my bank and my credit card company. That is materially different from allowing a waiter or a clerk in a store to initiate the transaction. Paying on-line not only saves the postage but allows you to be sure the payment arrives on time, not always the case with sticking it in the mail.
And of course some banks charge a fee, sometimes an unexpected one, on “PIN-based” debit transactions as opposed to a “signature-based” transaction.
If these reasons for dumping your debit card strike you as a little eccentric, let me spell out a few that have a more substantial, even a legal rationale.
Debit Card Holds. You may
not be aware of it, but when you use a debit card to reserve a hotel room, rent
a car or even fill up your gas tank, the vendor may put a "block" on
your checking account until the transaction is processed…and the amount of the
block can significantly exceed the purchase price. For example, you might use
your debit card to buy $25 worth of gasoline, but before you start pumping the
merchant may “block” $100 of the money in your account. This
can even result in overdraft charges on your checking account.
Rewards. I am not a big rewards enthusiast, but maybe you are. I don’t fly much anymore, so frequent flyer miles are not something I get excited about. I am even less excited by zirconium jewelry and subscriptions to magazines I have no interest in reading. And some rewards programs are a nuisance; you may have to sign up specially and then remember to use that card for the next several months for all your purchases of one kind or another. I do use the same card for all my gasoline purchases and that saves me several cents per gallon. I received a pleasant surprise recently when one of my credit cards canceled its rewards program and sent me a check for over $500 to close out my rewards account, a rewards account I didn’t even realize I had! Some debit cards now offer rewards programs but that is the exception rather than the rule.
Extended Warranties. Many credit cards include a feature which automatically extends the regular manufacturer’s warranty. That’s not a big consideration when you are buying a meal in a restaurant or buying some groceries, but it could be very important with regard to that new iPad or big screen TV.
Dispute. An important advantage a credit card has over a debit card is the ability to dispute a charge. This is required by federal law. I have done that successfully several times when merchandise did not arrive or arrived damaged or somehow failed to conform to the merchant’s representations. There are some limits and procedures (they are spelled out on the back of your invoice, but get out your magnifying glass), but it is always nice to be able to debate these matters with a merchant who does not already have your money.
Fraud monitoring. Several times I have received calls from my credit card company questioning charges that had been made to my card. They have some sort of computer algorithm that recognizes when your purchases somehow don’t fit your profile. One time I went down-country and charged some gasoline at a gas station I do not frequent, picked up a quick meal at a fast food restaurant down the road, then did some shopping at several stores for clothing, electronics, etc. about 100 miles from home Apparently the computer at the credit card company conjured up images of some ne’er-do-well joy riding down I-93 looting my credit card. My phone was ringing when I got home. It was the credit card company asking if I had made those purchases. I found it comforting that they were paying that sort of attention.
Several times I have received invoices with merchandise charged at stores I have never been within hundreds of miles of, have disputed the charges and have had them deleted from my account. Whether those were outright fraud or the result of someone carelessly entering an account number, I don’t know. I do know that no money ever left my account and that I never had to pay them.
Recently the credit card company alerted me to charges that had been made before I ever received an invoice. I confirmed that they were not valid charges, they changed my account number which they adjudged to have been compromised, and I heard nothing more of it. Your debit card’s PIN number might save you from some of these situations, but – again – once the money is out of your account, getting it back in is a lot more difficult than never letting it out in the first place.
If your credit card is stolen and the thief racks up a long list of charges, you are typically responsible for only the first $50 worth of fraudulent charges. If it is your debit card that is purloined though, you may be liable for as much as $500 in unauthorized purchases, unless you report the theft within two business days. And even then the excess of stolen funds may not be restored to your account right away.
Stolen Merchandise. Even if your card is not stolen, some credit cards even provide insurance if the stuff you bought with it is stolen! This feature is not advertised so is not widely known. It is called “purchase protection” and is offered on all American Express cards, Visa Signature cards and some MasterCards. It is not offered by Discover. And it is not available with your debit card.
The credit card company will likely require you to file a report with the appropriate authorities, may have a ceiling on the claims it will cover, and has the discretion to deny claims it thinks are suspicious or questionable, but it is another layer of protection furnished by your credit card but not your debit card.
The only argument which occurs to me that might trump all of my reasons to favor a credit card over a debit card is a lack of self-discipline. If your spending impulse is reined in by having to measure it against your bank balance each time you consider a purchase, and might run amok if you simply whipped out a credit card every time you wanted something, then perhaps you should stick with your debit card or a wad of cash. But do so with an awareness of all the advantages of your credit card which you will be giving up.
Recent Development. There is a possible caveat to all this as a result of a recent $7.2 billion settlement reached between credit card companies and a group of merchants: merchants are no longer prevented from imposing a surcharge on credit card transactions. Although it is suspected that competitive considerations may prevent most merchants from availing themselves of this newfound prerogative, be alert to the possibility that your credit card purchase might accrue such a charge for as much as 4%! In that case you might want to whip out your debit card or some cash...or shop somewhere else.