Your Finish Rich Plan - A Personal Finance Blog

Your Credit Card Is Better Than Your Debit Card!

Like most personal finance bloggers out there, I believe that people shouldn’t carry credit card debt (at least not consistently). I’ve written about getting out of debt, and about tricks and traps of the credit card industry so they can keep clients in debt and squeeze every single dollar out of them. That doesn’t mean, though, that I think that credit cards are intrinsically evil. Actually I think the opposite. When you master your card, it can turn out to be a powerful money-saving (and even money-making) ally.

Since so many people have gotten into so much trouble by (mis)using their credit cards, some have sworn them off and turned to debit cards, arguing that it helps keep them out of debt. While partially true, what they fail to realize is that debit cards have their own limitations, and in some cases they’re no match for what a credit card can offer. As long as you pay off your balance each month, there’s definitely a significant upside to using your credit card instead of your debit card because of the following: fraud protection, insurance, authorization holds, grace periods, and credit building.

Credit card fraud vs. debit card fraud

The law limits consumer liability for credit card fraud to $50. For debit card fraud, your liability is $50 if you notify the bank with 2 days of learning of the fraud, and $500 or more after two days, up to the entire amount stolen under certain circumstances.

Your debit card is usually linked to your checking account. If the thief drains it, he has already made out with your money, and you have to fight with the bank to get your own money back. Meanwhile, your other checks could bounce and you could face bounced check fees, negative marks on your credit reports, cash flow problems and other hassles. With credit card fraud, you simply fight with the bank about getting disputed charges off your account, not getting your own money back.

Discover, Visa and Mastercard have implemented “zero liability” policies that protect you against debit card fraud provided that certain (reasonable) conditions are met. While many debit card issuers offer the same protection against fraud as that of credit cards, it still means closing the barn door after the horse is already out. It may take some time to restore the funds to the account, unlike a credit card where the cardholder can withhold payment on any fraudulent purchases.

Insurance Coverage

Here are the most common insurance benefits you can be eligible for when making your transactions with a credit card. Please note that not all of them are necessarily available for your particular card. The car rental insurance benefit, though, is pretty much standard. Check with your credit card issuer for details.

Car Rental Insurance. This benefit provides—at no additional charge—reimbursement for damage due to collision or theft up to the actual cash value of most rental vehicles. It is only available if you decline the auto rental company’s collision damage waiver option, or similar provision, if offered by the auto rental company.

Lost Luggage Reimbursement. When you pay for the entire cost of your tickets with your eligible credit card, you will be eligible to receive reimbursement for your luggage and its contents for the difference between the your claimed loss and the airline’s payment, up to $3,000 per trip, provided the luggage was lost due to theft or misdirection by your airline company.

Purchase Security Protection. Within the first ninety (90) days of the date of purchase, your credit card issuer will replace, repair, or reimburse you for eligible items of personal property purchased entirely with your eligible card in the event of theft, damage due to fire, vandalism, accidentally discharged water, or certain weather conditions. Restrictions of a maximum of $500 per claim and $50,000 per cardholder usually apply.

Travel Accident Insurance. If your entire fare is charged to your credit card, you and your eligible dependents become covered automatically for Accidental Death and Dismemberment benefit. Coverage begins and ends at the places designated on the ticket purchased for the trip. Visa’s coverage starts at $250,000.

Extended Warranty. Extended Warranty enables you to make a claim for repairs if the original manufacturer’s warranty has expired on an item you purchased on your eligible credit card. Your claim must be made within the Extended Warranty period, which is usually double the time of the manufacturer’s warranty, and up to one additional year. Check with your issuer for a list of eligible items.

Debit cards simply don’t offer those coverage options.

Authorization Holds

An authorization hold is the practice within the banking industry of authorizing electronic transactions done with a debit card or credit card and holding this balance as unavailable either until the merchant clears the transaction, or the hold “falls off”. For debit cards, authorization holds can fall off the account (thus rendering the balance available again) anywhere from 1-5 days after the transaction date; in the case of credit cards, holds may last as long as 30 days, depending on the issuing bank.

As a result, establishments that take several days (and sometimes weeks) to settle transactions, such as hotels and car rental agencies, sometimes do not accept Visa or MasterCard-branded debit cards, as the authorization holds can expire before the transaction is settled.

Another “problem” to factor in is that the final cost of these transactions can be extremely unpredictable due to unforeseen extras such as room service charges, refueling charges, or longer stays. So these companies typically place a hold on the customer’s credit card at the beginning of the transaction for the estimated total plus a percentage or a fixed dollar amount (such as the estimated rental charges plus 15% or $250 — a policy many customers are not aware of). They don’t settle the transactions until after the customer has checked out or returned the rental car. If you’re using a credit card, that might not be a problem, but in the case of a debit card, whatever amount is being held in excess of the cost of the transaction is money that’s rightfully yours but that you’re unable to spend. If you go by the amount of your bill and not the amount of the hold, you might be in for some unpleasant surprises.

Finally, some hotels and car rental companies use the requirement of a credit card as a tool to screen high-risk customers, as credit cards usually require a good credit history, while all that is needed for a debit card is a checking account.

Grace Period

The grace period is the number of days before the card company starts charging interest, and it applies only to new purchases. It’s usually a period of 20 to 25 days, but that “free ride” doesn’t work the same way on all cards. On most credit cards, you will be charged interest on your new purchases immediately — unless you have paid off your credit card in full the previous month.

What that means is that if you don’t carry a balance on your credit card, with proper planning you can essentially pay for an expense and then pay off your balance before it starts accruing interest. That’s the equivalent of an interest-free loan! On a debit card, if you don’t have the money, you’re out of luck. Or you can overdraw your account and face the consequences.

Credit Building

The surest way to get credit if you don’t have it is to apply for a secured card. Secured credit cards work just like normal credit cards but require a deposit - usually between $99 and $500 - to protect against you skipping town without paying the bill. Most cards come with an annual fee for the “convenience,” but the fees are getting lower and are a small price to pay. It’s important, however, to recognize that many institutions have taken advantage of people in the position of needing a secured credit card and have charged them outrageous fees. Your payment history on the card slowly builds your credit history and after a certain amount of time of on-time payments (usually one year), you can apply for an unsecured credit card.

Sure, you can pay your bills with a debit card, but doing so consistently might result in you having a thin credit file. Paying your bills with a credit card gives you double the benefits. You get the positive marks for paying your bills on time, and another positive mark for paying your credit card bill on time.

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As you can see, although they have their flaws, credit cards do offer some great benefits to their users. The key is to master your card, and not have the relationship be the other way around. Try and put yourself in the position to pay off your balance every month, and you’ll realize that a credit card can yield so much more benefit than a debit card.

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