Credit vs Debit - Part 2

Earlier I posted my own views on the credit vs debit card issue, and in that piece I referred to something I'd read on AOL that was touting the use of credit cards as a better option. AOL was very accommodating (although I'm sure it was unintentional) in featuring that same piece again today, as a link on one of the welcome screen panels. The information actually comes from an article in The Street, which is a money and finance publication.

Here is the link to the story:
http://money.aol.com/thestreet/banking/credit-cards-vs-debit-cards

So, now that I have the full article handy, let me tackle their points one by one...

1. Fraud protection:
The article claims that there is more fraud protection on credit cards than on debit cards. This may be true to an extent - but both credit and debit cards put a long list of restrictions in their fraud protections which, in the long run, could easily mean you aren't protected at all. Further, the article claims that if you aren't timely about reporting a lost or stolen debit card, you could be out of luck. The same is true for credit cards - and really, why would you delay? If my card goes missing, you can bet I'll be on the phone to cancel it even before calling the police. Better safe than sorry.

2. Merchant Disputes:
The article claims that using a debit card puts you in a weaker position if you have a dispute with the merchant about the item purchased. But let's face it - no matter how you paid for the item, the merchant is not going to be happy about giving you a refund. When the dispute is settled, however, it can still take up to 2 weeks to get the money refunded to your card, no matter which one you use. The primary difference though, is that if you used a credit card, you're likely to have incurred interest charges on that purchase before the amount is refunded. The merchant isn't going to cover that, and while you can dispute the interest with the credit card company, the process is long, complicated, and designed to be more trouble than it's worth so that you'll opt to pay the interest rather than going through the hassle.

You won't have that problem with a debit card. There are no interest charges, so when the money is refunded, it's all yours.

3. Personal Account:
The article claims that using your personal funds (via a debit card) puts you at risk for a cascading default on all your other payments should there be fraud or a dispute over a purchase. Nevermind that the only way that can happen is if you were overspending in the first place, or if the card is stolen and used by the thief (in which case the fraud protections should kick in if you report the theft immediately - which also helps you avoid any problems with late or bounced payments due to the theft).

If anything, you're far more likely to end up in default on a credit card than by using debit cards for all your transactions. Let's face it - if you didn't have the money to buy that HDTV in the first place, then you're not likely to have the money to pay for it when the bill comes in either.

4. Rewards:
The article claims that the rewards offered by credit cards are more "valuable" than those offered by some debit cards (most debit cards still don't offer rewards). However, it's important to weigh the actual value of those rewards to your own life and circumstances. For instance, I don't fly, so frequent flyer miles or points are not valuable to me. When I lived in NY, I used public transit, so gas rewards were useless too.

The only reward that seems universally valuable is cash back, but even that is such a small reward (usually 1% or less) that it's almost negligible. Do I really care that much if I get 89 cents back on a $89.00 purchase? Yes, over time those cash back rewards do add up, but you'll be waiting a very long time before you earn enough cash back to even buy lunch.

Most of all, it's important to remember that those "rewards" have a price of their own. You have to spend a lot to get a little back. Basically, it's a gimmick they use to encourage you to buy things you can't afford with their credit card, which earns them far more in interest and fees than you will ever get back in rewards.

5. No Added Services:
The article claims that credit cards offer added services such as extended warranties and insurance on rental cars. But there is much they leave out, such as the fact that these benefits are usually only available on higher level cards (gold or platinum), which is the way they encourage users to increase their spending limits (and then max them out). Those same services can be purchased from the merchant (extended warranties are offered at almost all major stores these days - even on small ticket items like a blender) or rental company. Yes, you will pay for them - but you're paying for them when you get them from your credit card too (it's called interest, annual fees, maintenance fees, etc.). You're also paying for them when you buy the product or service, as the price is often increased to cover the cost of those "benefits".

6. Tracking Spending:
I found this to be one of the most laughable claims made in the article. The author claims that it can be difficult to keep track of your balance when using a debit card if you aren't "diligent about writing down" every transaction. Excuse me? Isn't this the age of online banking? Any time I want to check my balance, all I have to do is log into my bank's account services - which I can do from my pc, laptop, library pc, or even my cell phone. Further, many debit card charges are processed in real time, so by the time you get home and fire up your pc, the transaction is complete and the new balance is reflected in your account. Some are not processed as quickly, but it's a simple matter to keep your receipts, add up any that haven't been processed yet, and subtract that total from the balance reflected in your account. This isn't rocket science, folks.

7. "Banks May Trick You Into Fees":
Are they kidding or what? Like credit card companies don't do this? In fact, credit cards are far more likely to hit you with unexpected fees than your bank. Their terms and conditions are so convoluted you'd need a whole firm of lawyers to sort out what fees you'll be charged, when, and why or how to avoid them. Banks are a bit more straightforward. They will charge you an overdraft fee if you bounce a check or spend more than you have in your account, and they charge you for using some ATM's as well. But that's all, and if you're careful about your spending (and take your cash back at the local supermarket instead of the ATM), you can avoid those fees entirely.

8. Credit History:
The article claims that banks do not report your transactions and payments to credit monitoring agencies like Equifax the way credit cards do. However, it fails to mention that this has a negligible effect on your credit rating. As long as you're paying those bills on time, your credit rating won't suffer because you paid them with a debit card or check. Those you owe money to - whether it's your local utility company or your mortgage - WILL report you if the payments are late or you default on the account (which is far more likely when you use credit cards for everything, as you're likely to find yourself in more debt than you can pay back).

So, to keep your credit rating in good standing, the best thing you can do is pay your bills on time. What card you use for that is irrelevant.

9. Not Always Accepted:
The article claims that you cannot always use your debit card for certain things, such as renting a car. The article does not list any companies that refuse debit cards, and I have found no instance in my own experience where that was the case. My husband and I have reserved hotel rooms and rented a U-Haul truck and storage space, all with a debit card. The primary factor is whether or not the limit on the card is sufficient to cover the fees and any security deposit.
It is true that you often have to wait several days or a week to get that security deposit back - but that is true no matter which card you use, and again there is the risk that you'll be charged interest on that deposit if your credit card's billing cycle ends before the refund is made.
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So perhaps now you can see why I felt the article was commissioned (and perhaps paid for) by a credit card company. The fact that it appeared in The Street, a publication dedicated to influencing the continued health of the stock market, makes the article even more suspect. After all, if more Americans stick to using their debit cards, then the credit card companies will make less profits, and that would have a detrimental effect on their stocks - often a major player in the portfolios of the affluent among us.

But, I'm not a financial advisor. I'm just a consumer who has learned from experience that buying anything on credit is a ticket to financial disaster, especially when so many of us are living paycheck to paycheck these days. One illness, one layoff, or one emergency like a car accident or broken refrigerator can easily set you on the path to bankruptcy as those credit card fees keep piling up faster than you can pay them off.

I won't ask you to take my word for it. Just think about it, and don't let yourself be manipulated by misleading advertising or articles with an agenda that does not include your best interests.

To help you in making your decision, I recommend you read the following article, also featured on AOL (on the same day!):
http://money.aol.com/top5/credit/credit-card-costs-to-avoid

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