Credit Cards vs Debit Cards
Posted December 12th, 2008 and last modified December 29th, 2011
Debit Cards vs Credit Cards - Both have their benefits, but you need to choose the right one for you
Australians have always been close to their plastic. Since electronic banking came into the picture, we’ve preferred swiping our purchases to forking over bills and change. And since the option became available, we’ve constantly mulled over the credit vs. debit war, although most Australians now use both.
So far, debit is winning: according to Canstar Australia, debit cards were used in 55% of card transactions in 2009, with credit cards making up the rest. The numbers have been reversed from 2002. But while it’s easy to assume the recession has made us debt-averse, credit is still very much in the game: consumer credit reached new highs earlier this year.
The “plastic war” rages on, but we consumers have a choice to make. Should you use credit or debit? Here are some points to consider.
What type of consumer are you?
Mint.com, a financial management tool, classifies consumers into four types. The first two carry credit card balances from month to month, but either pay on time or frequently miss their deadlines. These two are the credit companies’ biggest victims—they’re the ones at the mercy of interest rate fluctuations and arbitrary increases. If you’re one of them, switching to debit for the bulk of your shopping may be a good idea.
The other two types are the light and heavy users who carry no balances and always pay on time. Often, their main reason for using credit cards is the rewards program. In this case, credit cards are more practical—you don’t pay interest, and if you use it right, you get the occasional freebie.
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The rewards game
Note that in the last two consumer profiles, the operative phrase is if you use it right. Rewards programs are often in place to get otherwise responsible consumers to overspend. If you’re just $50 away from a free gift, so you pick up that $60 pair of jeans. In effect, you bought your free gift for an extra $10, even if you get to keep the clothing. If you’re overspending to get free miles, concert tickets, or a cash-back reward, then you’re not really on the winning end.
Some debit cards have rewards programs, but they’re not as attractive as those attached to credit cards. This is because they have a lower profit margin; that is, the bank can’t charge the same fees and penalties as they do with borrowers. There’s less incentive for them to give away free stuff when it’s less likely that they’ll get the money back in interest.
Getting around
Avid travellers can hardly picture themselves without a credit card, even if they can afford to carry wads of cash across continents. Credit cards give them access to first-class lounges, elicit VIP treatment at hotels and restaurants, and sometimes even pays for their trips, thanks to frequent flyer miles. This is one of the biggest come-ons of credit cards, although like in-store rewards, the math usually works in the bank’s favour. Indeed, the Wall Street Journal reported last year that credit card issuers are being even stingier with their free miles.
On the road, however, credit cards offer some real advantages. Visa and MasterCard are accepted worldwide, and American Express is gaining ground. Many Australian debit cards will work overseas, but fewer establishments support them. EFTPOS, the payment network in use in Australia and New Zealand, has even more limited coverage.
Play it safe
If safety is on top of your list, then you’ll want to stick to debit cards. There’s no risk of being penalized or caught in a spending spree—you simply cannot buy once you’ve spent all your money (overdraft protection can tide you over temporarily, but not for long). Of course, it’s for that same reason you might want to keep a credit card on hand anyway. Most experts suggest having an emergency card with a good credit limit ready at all times, so you don’t find yourself at a complete loss.
At the end of the day, debit and credit cards aren’t really competing for attention—there are markets for both of them, and as we’ve mentioned, most Australians carry both anyway. Think of them as a financial tag team: you use one for everyday spending and maybe the occasional perk, and the other will have your back if something goes wrong.
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