Understanding credit vs. debit cards

Credit cards and debit cards are the two most popular forms of plastic money. Each has its own benefits and drawbacks. Many people carry both, but a review of pros and cons can help you decide if you want to limit yourself to one or the other.

Credit cards

Pros: A major advantage of credit cards is personal liability limitation. With identity theft now a serious issue, the federal Truth in Lending law limits to $50 the amount a cardholder must pay if a credit card is stolen.

Credit cards also:

• Offer a convenient purchase method when you don't have cash.
• Help you build up a credit history.
• Provide a source of money for emergencies.
• Are accepted by most stores.
• Offer benefits such as frequent flier miles.
• Allow you to make purchases online.

Cons: A disadvantage to credit cards is they can be too convenient. You might appreciate that you can buy what you need without going to the bank to withdraw cash, but a credit card balance can get out of hand quickly. Credit card companies can also:

• Charge late payment fees of around $30.
• Charge annual use fees on many cards.
• Increase your interest rate, often in excess of 22%, if you miss a payment.
• May require you to spend $10,000 or $15,000--often on a dollar-per-mile basis-to get to that magic "free trip" number.
• Charge transaction fees on cash advances.
• Use "floating" annual interest rates that can go up without a notice.

Debit cards

Pros: Debit cards offer a convenient way to buy things in a manner that is almost like writing a check, but faster. When you use your debit card, the purchase amount is subtracted from your bank balance almost immediately. Debit cards also:

• Can be used to obtain money from ATMs all over the world.
• Provide you with a receipt you can use to check your balance.
• Allow you to buy postage stamps at some ATMs.
• Allow you to make deposits or transfer funds between accounts.
• Allow you to make purchases online.

Cons: One danger of carrying a debit card is the trouble you can get into if it is stolen. You can be held accountable for $500 worth of unauthorized purchases if a debit card theft is not reported within 48 hours. If you wait 60 days or more to report the loss, a thief can clean out your entire account. With debit cards you may also:

• Pay a quarterly or annual use fee.
• Pay a "point-of-sale" fee when swiping the card through a reader and entering your personal identification number.
• Pay a fee for using it at an ATM not owned by your bank.