Everyday Financial Planning: Debit vs Credit

Everyday Financial Planning: When to Use a Debit Card rather than a Credit Card

Financial Planning Debit CardMost American consumers have a variety of plastic in their wallets, including both debit cards and credit cards. How do you select whether to use your debit card or a credit card? Did you know that this everyday financial planning decision can be made in a strategic manner? After all, there are certain times and certain types of purchases where it is advantageous to use a debit card rather than a credit card and vice versa. In this previously published Summit Brokerage blog, entitled “Everyday Financial Planning: Credit vs. Debit,” we defined the terms “debit card” and “credit card” and discussed instances where it may be advantageous to use a credit card rather than a debit card. This blog will discuss instances where it may be best to use a debit card rather than a credit card.

 

When to Use Debit Cards (rather than Credit Cards):

 

  • When the other party needs to be paid ASAP: If the other party needs the funds from your purchase transaction as soon as possible, use your debit card because electronic debit card purchases usually go through almost immediately after the time of the purchase. On the other hand, credit card purchases sometimes have a several day lag from the time/point of purchase.
  • If you’re on a restricted budget, recovering from poor money management, or tend to overspend when using credit cards: When it comes to everyday financial planning choices, credit cards can be both a powerful tool for some users and a Pandora’s box and slippery slope into compounding debt and poor financial decision making for others. Debit cards are a good choice for people who are in debt, have a tendency to spend beyond their means, or have a restricted budget because you can only spend the money that is currently in your bank account (that the debit card is linked to) as opposed to spending money you don’t currently have when your credit card pulls money from a line of credit. As a financial planner may often tell his or her clients, debit cards make it easier to get a sense of control over your spending since you can check how much you have spent and how much money remains in your account in real-time. However, as discussed in this previously published Summit blog, credit cards typically offer more security against fraudulent transactions than debit cards. So if you’re going to be regularly using a debit card, try to find a bank that offers a debit card with a zero liability policy on your debit card account so you are protected against fraudulent transactions.
  • To get a better exchange rate on foreign currency when travelling abroad: While credit cards, due to their security features and protections, are often best for making flat transactions abroad, if you need actual cash in a foreign currency, you will often get the best exchange rate by using your debit card and an ATM in your foreign destination. There are more than 800,000 ATMs across the world with ATMs in almost every international airport and on all seven continents (there’s even an ATM machine at the McMurdo research station in Antarctica!). There’s two major ATM networks—Cirrus (run by MasterCard) and Plus (run by Visa). Before your trip, you can verify that there is an ATM at your foreign destination by using Visa’s online ATM locator tool and MasterCard’s online ATM locator tool. While it may be more convenient to convert money before you leave the U.S., you’ll almost always get a terrible exchange rate. If you use your debit card at a foreign ATM, you’re not going to quite secure the wholesale exchange rate, but you’ll come as close as possible. Both Plus and Cirrus network ATMs will add a 1 percent conversion fee to the wholesale exchange rate plus your bank will usually charge you a $2 to $3 ATM fee (sometimes higher for overseas transactions). Given the per-transaction ATM charge, you will save money by making a few big withdrawals from the ATM rather than many, small ATM withdrawals. Credit cards tend to be more expensive than debit cards for obtaining foreign currency because not only do credit card companies usually charge a 1 to 2 percent conversion fee over the wholesale exchange rate but also they will charge you with a cash advance fee (often 2 percent or $10, whichever is higher). Call the bank linked to your debit card as well as your credit card company before your leave for your trip to find out what their fees and policies are for international usage and ATM cash withdrawals.

 

Summit Brokerage Services was voted the #1 boutique independent broker dealer in the country. Let us show you why! To experience the Summit difference and learn more about our network of independent financial advisors, visit https://www.summitbrokerage.com  or call us at (800) 354-5528.

 

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.

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