For personal finance and budgeting, is it better to have a credit card or debit card? All depends on your personal needs. Although credit and debit cards might look the same, they're quite different. Knowing the advantages and disadvantages of each can help your financial planning.
Credit Cards
Credit cards enable you to spend more money than you currently have. That can be a big help in an emergency, but keeping a balance due on your credit cards can also be costly. Paying your credit card balance in full each month can help you to improve your credit score. If you don't pay your balance in full by the due date, you'll rack up interest charges.
Many issuers of credit cards increased the interest rates for customers before the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 went into effect on Feb. 22, 2010.
To read how the CARD Act could affect you, visit:
www.creditcards.com and www.creditcards.com/credit-card-news/credit-card-law-interactive-1282.php.
Thanks to new provisions that are part of the CARD Act, credit cardholders whose interest rates have gone up may receive rate reductions after six months if they don't exceed their balances and if they pay their credit card bills on time.
Another consumer protection of the CARD Act is that issuers must notify cardholders 45 days before any significant changes to the terms of their accounts take place. Issuers also must give cardholders an opportunity to "opt out"—that is, close their account—if the cardholder doesn't agree with the changes.
For many cardholders, Rewards programs—such as airline and hotel points—used to be a big incentive for using credit cards instead of debit cards. However, many card issuers have started trimming back rewards programs in order to save money.
A big advantage of credit card over a debit card: protection. If someone steals your card, you can notify the issuer and dispute the claim. The amount fraudulently charged will be removed from your account. Although you also may be protected from charges on your debit card that a thief might make, it can take several weeks for your bank to investigate the charges. In the meantime, your bank account balance may have dwindled and you also may have bounced some checks.
Debit Cards
Because a debit card is associated with your bank account, you can only spend as much money as you have in your account. Using your debit card to pay bills can help you with your monthly budgeting, and your monthly bank statement will record your day-to-day spending. This can help you to determine any needless spending and get your personal finances in order.
A double-edged sword of debit cards: overdraft protection. Although this can act as a safety net against charges for bounced checks, overdraft protection also generally comes with extra charges: interest charges and fees.
Both a credit card and a debit card have benefits, but your own personal finance situation should dictate which kind of card you select. Before making a decision, be sure to learn about new consumer protections that are part of the CARD Act.
Sources:
A guide to the Credit CARD Act of 2009, http://www.creditcards.com/credit-card-news/credit-card-law-interactive-1282.php
Watch out for new credit card traps, CNNMoney.com, http://money.cnn.com/2010/02/17/news/companies/credit_card_rules/
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