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Compare debt-free plastic payment options

Debit and charge cards can be convenient and budget-friendly

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The new year is typically when people resolve to improve their finances, but after the wild economic ride of 2009, budgeting and money management are a higher priority than usual.Debt-free plastic

Charge cards and debit cards can help consumers avoid accumulating debt and rein in free-spending, though each has pros and cons that can make a budget or break one.

"Whenever you're going through tough economic times and certainly a recession, consumers are looking for ways that they can control their money," says Marina Norville, a spokeswoman for New York-based American Express. Since 1958, the company has offered charge cards as a way for consumers to make purchases, though they differ from credit cards in that they require consumers to pay the entire balance each month. As a result, consumers can't fall into debt, a benefit that's particularly relevant in light of the recession. "In essence it's like plastic willpower," says Norville.

Debit cards also are increasingly being viewed as a money management tool. According to a recent survey commissioned by San Francisco-based Visa, 76 percent of debit card users said the cards helped them track spending and 63 percent said debit cards helped them stick to their budgets. Since that same survey found that American consumers lose track of $1,000 a year in cash, debit cards -- which leave an electronic trail of purchases -- can play a role in helping people stay on top of their spending, says Visa spokeswoman Kate Mulhearn.

Financial experts agree that both charge and debit cards can be helpful to consumers who are trying to stay out of debt, but more factors should be taken into consideration when determining whether either option could contribute to a more financially fit 2010.

The case for charge
One of the greatest benefits of charge cards, made famous by American Express, is the convenience of making purchases on plastic and having one bill to pay each month. With Americans becoming more adverse to debt in the past couple of years, American Express unleashed a major ad campaign in 2009 touting the benefits of charge cards over credit cards, and is targeting twenty- and thirty-something professionals with a charge card called Zync.

"One thing we found out from this demographic is that they really want control," says Norville. "They don't want something that's going to let them spend --they're quite afraid of getting into debt." As a result, the company is banking on the fact that financially conscious young professionals will find the no-debt policy of charge cards appealing.

Type of card Whose money you're spending Revolving debt capabilities When to use them When not to use them Costs/fees Risks
Charge cards Card issuer's money No When making everyday purchase that fit your monthly budget, particularly if paying for purchases immediately would disrupt cash flow When making purchases that you won't be able to pay within the month Annual fees Late fees on late payments; could impact credit; spending can exceed budget
Credit cards Card issuer's money Yes When making large necessary purchases that may take longer than one month to pay When making unnecessary purchases that will require several months to pay Interest on revolving balance; annual fees Late fees on late payments; could impact credit
Debit cards Your money Yes, if you opt to have an overdraft account. No, without an overdraft account. When making small everyday purchases that fit into your monthly budget, with funds left in your checking account. When making purchases that don't fit into your monthly budget and that will leave your checking account in danger of being overdrawn. Bank fees; interest on overdraft account balance Overdraft fees if account is overdrawn; holds on account while charges clear could affect cash flow

While the knowledge that you must pay the entire balance each month may be enough to get some consumers to think twice before making purchases, charge cards offer other perks. "We have a number of budgetary tools that we provide our card members as well," says Norville. Services such as the company's online Money Manager let cardholders track all of their spending and help them avoid getting into financial trouble. "If you wanted to make sure that you didn't go over $500 a month, you can have an account alert send you via text message or e-mail letting you know when you've hit that $500 balance," Norville says.

Rewards and special features such as return protection, in which American Express will in some cases let a cardholder return unwanted merchandise even if the retailer won't, provide even more value. In addition, charge cards can help those who are on a tight budget since the payment for a product can be put off for 30 days. "It's essentially a 30-day float for your money," says Norville. "It's better than debit because your money isn't automatically withdrawn."

But there is a potential downside. Charge cards can affect your credit, particularly if you don't make your payment in full each month, says Andrew Grasso, a financial specialist with Richmond, Va.-based Clearpoint Credit Counseling Solutions. There's also the risk of overspending since the money isn't due immediately. Another con has to do with costs. "Sometimes it may not be worth it to use a charge card if they have that annual fee," says Grasso. For example, the most basic American Express charge card (the Preferred Rewards Green Card) annual fee is $95.

Digging out of debt with debit
Debit cards have their share of pluses and minuses as well.  For those who want to avoid debt, debit cards access one's own funds rather than credit. They also have no bearing on your credit score unless you have an overdraft account that you default on. While debit cards used to have fewer protections against fraud than charge cards, many financial institutions extended their credit card safeguards and identity theft protections to debit card users. It can also be easier to track purchases with a debit card since you can request receipts or visit your account online.

But for some, debit cards may come at a cost, points out Grasso. An overdrawn checking account can lead to an overdraft fee that averages $26, according to Lake Bluff, Ill.-based economic research firm Moebs Services. The number of consumers affected by overdraft fees is likely to decline later in 2009 since new Federal Reserve rules will require consumers to opt-in to overdraft protection plans starting July 1, 2009. But those who would prefer the overdraft protection to having their purchases denied due to insufficient funds would still be subject to the fees.

Since debit cards withdraw funds directly from one's checking account, they also require consumers to be more vigilant about how much is available to spend. And if a hold is put on an account due to a purchase that hasn't yet cleared, that can affect your day-to-day cash availability, Grasso says.

Find the right choice
No option is perfect, and any form of plastic may cause you to spend more than you would with cash.  "When you go to the grocery store with $100, you're going to make it stretch. If you went with your debit card, it's easy to do $110. If you go with a charge card, it's easy to do $200," says Grasso. "Cash is king, but charge cards and debit cards offer convenience."

See related: Debit card users now more protected from fraud, study says, Is the American love affair with credit cards over?, Fed: Consumers must opt in to debit card overdraft fees

Published: January 11, 2010



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