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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Debit or Credit Card? It's Not a One-Size Fits All Choice

In today's cyber-business dominated economic system, it has become a near necessity to have some form of "plastic" in order to be able to take part. Basically, this plastic comes in the form of either a debit card or credit card. 

To give you some idea of the usage of these cards, a Federal Reserve Payment Study published in January 2020 (the latest in a series of triennial studies on the matter) showed that in 2018, debit cards were used in 86 billion transactions valued at about $3.1 billion, whereas credit cards were used in almost 45 billion transactions valued at $3.98 billion. As the study pointed out, "Debit cards, including both prepaid and non-prepaid, were used almost twice as often as credit cards in 2018, but the value of credit card payments exceeded the value of debit card payments by almost 30%." Further, the average transaction value for a debit card was $36, whereas for a credit card it was $89, showing a tendency for credit cards to be used in higher-dollar transactions. 

But which is the better choice? Answer – it depends. It depends on which factors or characteristics of each are most important to you, as well as, your ability to handle credit and not spend beyond your means. 

With that said, let's take a look at some of the differences.

Protection Against Fraud. A difference that could be important is the protections afforded against fraud. With a typical credit card, you are held liable for no more than $50 in fraudulent charges. And frankly, most of the major credit card issuers will not hold even that against you when reported promptly. 

For a debit card, however, that $50 limit applies only of a lost card or PIN is reported within 48 hours. The limit goes up to $500 if reported within days. After that, you could be on the hook for an unlimited amount. 

For this reason, some experts think it is safer to use a credit card especially in certain higher risk situations. For example, I have had my credit card information stolen at a gas pump where someone had unscrupulously installed a skimmer in the credit card slot. And any situation where the card leaves your sight for a moment can be risky as well. 

Disputing a Charge. With a credit card, if a dispute arises over a transaction, the charge is generally put on hold while it is under dispute. With a debit card, it can be more difficult of a situation because the money is already gone and it can sometimes take quite awhile for it to come back, if ever. I say "if ever" because I've heard horror stories of people who legitimately made such disputes, got virtually no help from the bank and never saw the funds again. While these are anecdotal in nature, and there are always at least two sides to every story, they seemed to be real situations and certainly caused real problems. 

Long story short, with both a fraud situation or a disputed transaction, with a debit card the money is already out of your account and can be hard to get back, not to mention the potential financial burden you may face while it's gone. With the credit card, at least you generally don't have to pay for the fraudulent or disputed transaction while the situation is being investigated.

Building Credit – Credit cards also can help consumers build their credit scores, something not possible with debit cards, as debit cards have no effect on your credit score. But keep in mind, this is accomplished by paying off your balance in full each month. If not used and managed properly, credit cards can also affect your score in a negative way.

Perks – Many credit cards offer enticing rewards, such as cash back, points for travel awards, discounted gift cards, extended warranties, travel insurance, etc. Of course, as with building your credit, if you aren't careful to manage the card well, i.e., pay it in full each month, interest charges you incur will usually outweigh those rewards.

As to debit cards, they typically don't come with any rewards attached. However, with credit card surcharges becoming more common, it may cost you less to use a debit card, which is not a bad perk unto itself.

It may seem up to this point that I'm advocating that credit cards are the way to go. That's not necessarily the case. For one thing, you have to be able to sleep at night, and for some people, having credit card debt out there is an impediment to that. If it makes you uncomfortable, then don't do it! 

For another, being able to defer the "pain" of paying for purchases until later by using a credit card can, for some people, be a dangerous financial risk. You have to have the discipline not to outspend your means and to be able to, and actually do, pay it off each month. To not do so is to subject yourself to the usually outrageous interest rates the credit card companies charge, and which only work to their advantage. 

It's difficult to get out from under those once you get upside down and can be a financial killer. If that's not something you can handle, then by all means, stay away from a credit card.

And finally, people who use debit cards tend to spend less money, which can really help you stick to your budget!

Lane Keeter, CPA, is Office Managing Partner of the Heber Springs office of EGP, PLLC, CPAs & Consultants (a full-service financial firm with offices in Heber Springs, North Little Rock and Bryant) and past winner of The Sun-Times Reader's Choice Award for Best Accountant

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