Choosing Credit or Debit?
For some of us the choice between using a debit card or a credit card can seem more complicated than it needs to be. While many debit cards are now able to perform both types of transactions if the proper equipment is available, it may be necessary to have both types of cards if you want to make the decision based on the specific transaction. The other option is to rely exclusively on one type of card or the other. The first step in making the choice is to understand the difference between the two.
Using credit is making a purchase with money that has been loaned to you. With a traditional credit card, there is no fee charged for the actual transaction, but you may be charged an annual fee for the use of the credit card or interest on the amount that you have borrowed. Typically, the credit card will offer what is known as a grace period during which the “loan” is free of interest. If you pay off the entire balance that you charge on your card each month during this period, you can avoid interest payments entirely. If, however, you are unable to pay the entire balance before the end of the grace period, you will not only be charged interest on any remaining balance, but on any new purchases that you make as long as there is a credit balance on your card.
Many consumers prefer to use credit cards for a number of reasons. There is the lack of any fee charged to the consumer for credit purchases. In addition, many responsible credit card users are better able to mange their monthly budget by using their credit card to simply defer their actual payments until the end of the month. There may be a timer lag of a few days before the credit transaction is actually posted to the account, and it can be many days to a month before the consumer has to pay the debt off before the grace period even expires. And, of course, if money is tight, the consumer can take full advantage of the loan and pay only the minimum amount due.
Debit cards, on the other hand, pay for the purchases that you make directly from an attached account, usually your checking account. There are actually two types of debt transactions. Online debit transactions appear to occur instantaneously as the money is withdrawn from their account immediately following the authorization request from the merchant. However, a small fee may be charged for an online debit transaction, although this may be paid by the retailer. Another difference is that online debit purchasers may have the option to withdraw cash in addition to the amount of the debit purchase.
An offline debit transaction is much like a credit and is without cost to the purchaser beyond the face value of the transaction. The fees are almost always charged to merchants on offline debit purchases. When a purchase is made using the offline debit, or “credit” option, the transaction simply places an authorization hold on the customer’s attached account. The funds are not actually withdrawn until the transaction is completed, usually a few days later. There are even a few debit cards in the U.S. that offer rewards for using the offline credit option with your debit card. However, at many merchant locations the credit function is more difficult to access when using a debit card.
Choosing debit or credit is a personal decision, but it should be given some thought, especially when you are trying to follow a monthly budget. Be aware that each type of card and transaction will affect you cash flow and your finances differently.