Credit Cards vs. Debit Cards - Which Is Better?
In this second of a series on credit cards we're going to cover
the advantages and disadvantages of credit cards versus debit
cards. To understand these differences we first have to explain
how a credit card and debit card work, at least generally
speaking.
In general, the way a credit card works is you go to a store, or
these days even online, pick out the item you want, plug in your
credit card number and your purchase is complete. The item isn't
actually paid for yet, as far as you're concerned, because no
money has changed hands. After the transaction the merchant will
receive payment from the credit card company who issued you the
card, usually within 30 days and in turn you will receive a bill
from your credit card company, also within 30 days, at which
time you must remit at least a partial payment. Each credit card
company has different terms. Some, like American Express,
require you to pay your balance in full.
The way a debit card works is basically the same in most
respects. You make your purchase, plug in your number or swipe
your card and the purchase goes through. The merchant, again,
will get paid by the company who issued you the debit card. Here
is where the difference is. With a debit card the money already
has to be in your account. In other words, you've already paid
in a certain amount of money to be available to your debit card.
By using the card the money is simply transferred out of your
account and your balance is reduced until it reaches zero, at
which time you have to pay more money into the account or the
card can't be used.
The advantages of a credit card are that you don't have to have
the money available at that time to pay for your purchase. You
will usually have at least 30 days to pay for the item and even
then, based on the terms of your card, may not even have to pay
the whole balance.
The disadvantages of a credit card is that it becomes way too
easy to use them and run up large balances. Then when it comes
time to even pay partial payments it can be very difficult to
make those payments. Add to that the finance charges and people
with credit cards can run up large debts that they sometimes
never recover from.
The advantages of a debit card is that you know you have the
money in your account to pay for the item and you don't have to
worry about future bills or finance charges. It's as good as
cash without having to carry cash around with you.
The disadvantages of a debit card is that if you don't have the
money in your debit card account then you can't use it. In a
sense it's pretty much the same as if you don't have cash on you.
Many people feel that a debit card is just a compact cash
equivalent and doesn't really offer much more convenience than
cash. Others feel it is the only sure way to prevent yourself
from falling into a financial hole that you may never recover
from.
The debates between credit and debit cards will probably go on
forever.