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.