Everyday Financial Planning: When to Use a Credit Card rather than a Debit Card
Each day, modern consumers make a myriad of money management and financial planning decisions, with one of the most common decisions/questions being: paper or plastic? And no, we’re not talking about the type of bag you’re selecting in the checkout line. We’re talking about your choice of currency format: paper (cash) or plastic (a debit card or a credit card). While the U.S. is by no means a cashless nation, noncash payments have been slowly yet steadily rising over the last decade. According to new research released by Euromonitor International, “Payments made using credit, debit, charge and other cards will overtake cash payments worldwide for the first time in 2016, registering $23.1 trillion in consumer spending compared with cash’s $22.6 trillion. Both numbers are up year over year, with card spending rising from $21.4 trillion globally and cash spending up from $21.8 trillion.”
Since all this terminology can get confusing, let’s make sure we’re all on the same page by defining what we mean when we say “debit card” and “credit card”:
- Debit card: A debit card typically allows the cardholder to access funds currently in their bank account to pay for an item or to withdraw cash from an ATM. Unlike a credit card, a debit card does not increase your debt, unless you overdraft your account and your bank charges a fee/penalty for this service. Sometimes debit cards are also called check cards.
- Credit card: A credit card is a payment card (usually a small plastic card) issued to users by a financial institution that allows users to buy things that they agree to pay for later. More specifically, “credit card holders (who may pay annual service charges) draw on a credit limit approved by the card-issuer such as a bank, store, or service provider (an airline, for example). Cardholders normally must pay for credit card purchases within 30 days of purchase to avoid interest and/or penalties.” Sometimes credit cards are also called charge cards.
Do you select whether to use your credit card or debit card in a strategic manner? There are certain times and certain types of purchases where it is advantageous to use a credit card rather than a debit card and vice versa. The instant blog will discuss instances where it is best to use a credit card. A soon to be published Summit blog, entitled “Everyday Financial Planning: When to Use a Debit Card rather than a Credit Card,” will discuss instances where it is best to use a debit card.
When Credit Cards May Be the Best Option:
*Note: This blog assumes that cardholders are able to use credit cards in a responsible way. Remember, interest payments and late fees for not paying monthly credit card charges in full and/or paying late can quickly add up and lead to hamster-on-a-wheel debt situations. If you can’t use credit cards responsibly, you shouldn’t use them at all.
- When the card will go out of your sight/online shopping: When security is an issue, it’s typically better to use a credit card rather than a debit card. This is because most credit card companies have zero liability or limited liability (i.e., where the cardholder’s liability is limited to $50) for fraudulent or stolen credit card activity that is promptly reported and meets the other rules and restrictions of your cardholder’s agreement. On the other hand, using a debit card is more like using cash—and once it is spent (even if the expenditure is fraudulent), it is often gone forever and the financial institution may offer little or no recourse for recouping fraudulent expenses. That being said, it is usually a better choice to use a credit card in a situation where the card will be going out of your physical sight. For example, in restaurants a waiter may pick up your card from your table and you might not get it back for ten minutes or so—leaving a scammer plenty of time to write down your card information and use it fraudulently. Likewise, because credit card companies tend to have more extensive fraud detection and recovery services than debit card companies, it is usually safer to use your credit card rather than your debit card for online purchases.
- When a deposit is required with purchase: If you are making a purchase that requires a deposit—such as when a hardware store charges you a $75 deposit to rent their carpet cleaner—it is often a better idea to use a credit card. If you used your debit card in this hardware store example, the store would often put a $75 hold on your debit card to cover the deposit fee, which would make that $75 in your bank account temporarily unavailable to you. If you have limited bank account funds, this could make it easy to end up with insufficient funds or overdraft your bank account.
- When you purchase large items, appliances, and electronics: When you buy a large-ticket item, major appliance, or electronic item, the salesperson will often try to sell you an extended warranty for an extra fee. But did you know that many credit card companies offer their own warranty protection (some of which offer more coverage than the item manufacturer’s extended warranty package) for your purchases when you use their credit card? When purchasing these kinds of items, do your research about your credit card’s warranty package, the store’s and manufacturer’s warranty package, and the store’s return policy.
- When you want to improve your credit score/build your credit history: As a financial planner will tell you, building your credit history and improving your credit score can lead to a variety of financial planning advantages and ultimately save you money. One way to improve your credit score/build your credit history over time is to responsibly use a credit card for purchases and then pay off your credit card balance in full each month.
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About Summit Brokerage Services, Inc.
Summit Brokerage Services is part of Cetera Financial Group. Summit Brokerage provides a broad range of securities brokerage and investment services to primarily individual investors. Summit Brokerage also sells insurance products, predominantly fixed and variable annuities and life insurance through its subsidiary, SBS Insurance Agency of Florida. Summit Brokerage also provides asset management services through its investment advisor, Summit Financial Group, Inc.
About Cetera Financial Group
Cetera Financial Group® (“Cetera”) is a leading network of independent retail broker-dealers empowering the delivery of objective financial planning advice to individuals, families and company retirement plans across the country through trusted financial advisors and financial institutions. Cetera is the second-largest independent financial advisor network in the nation by number of advisors, as well as a leading provider of retail services to the investment programs of banks and credit unions.
Through its multiple distinct firms, Cetera offers independent and institutions-based advisors the benefits of a large, established broker-dealer and registered investment adviser, while serving advisors and institutions in a way that is customized to their needs and aspirations. Advisor support resources offered through Cetera include award-winning wealth management and financial planning and advisory platforms, comprehensive broker-dealer and registered investment adviser services, practice management support and innovative technology. For more information, visit www.ceterafinancialgroup.com.
*”Cetera Financial Group” refers to the network of retail independent broker-dealers encompassing, among others, Cetera Advisors, Cetera Advisor Networks, Cetera Financial Institutions, Cetera Financial Specialists, First Allied Securities, Girard Securities, The Legend Group and Summit Brokerage Services.