Both are plastic, both behave like money, but the credit card has better legal protection
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Credit or debit? That question will sound familiar to anyone who has presented their credit card or debit card when making an in-store purchase. But before you even get to the register, you should ask yourself that very same question.
Payment data from the Federal Reserve suggests that Americans have shifted much of their everyday spending to debit cards. Debit cards are pulled out more often than any other noncash payment method, used nearly 70 billion times a year in the United States to pay for $2.56 trillion in goods and services. Credit cards are used less often – about 34 billion times a year – but are used for more-expensive items, counting for $3.16 trillion in spending.
There are reasons that debit cards have become the plastic of choice for many consumers. Debit card payments come out of a checking account immediately, alleviating concerns over credit card bills and interest rates. Since debit cards are usually linked to a checking account, they can limit purchases to items cardholders are able to pay for at that moment, unlike credit cards. As such, debit cards may be a good option for those Americans that are carrying a debt load.
However, debit cards are not superior to credit cards in all respects. Consumers without a debt burden who pay their balance in full each month can benefit from up to 40 days of free float, or the time between when a purchase is made and when you actually pay your bill. With debit cards, the money is withdrawn from your account almost instantly.
And, that immediate withdrawal with a debit card is the reason credit cards offer greater protection for consumers. With a credit card, you have the option of withholding payment should you be unsatisfied with the quality of a purchase. But when paying by debit card, there is a good chance the merchant already has your money by the time you realize something is wrong with the purchase.
Debit vs. credit: legal protections differ
The law is more on your side when it comes to credit card purchases.
- With credit cards: The governing law is the Fair Credit Billing Act, which is implemented by Regulation Z. The law limits liability on stolen credit cards to $50, and if you report the loss before your card is used, you are not responsible for any charges. Most major credit card companies and issuing banks also offer zero liability protection to consumers. In other words, if a thief uses your account to make purchases, you’re not liable for a penny of the charges. Also, credit card users are not required to pay any amount that may be in dispute, meaning the cardholder retains use of the fund for the amount in question until the issue is resolved. While policies have changed in favor of debit card transactions (providing greater protection and in many cases zero liability), you still don’t have the degree of consumer protection with a PIN-based card as you do with a credit card.
- With debit cards: The governing law is the Electronic Funds Transfer Act and its implementing regulations, Regulation E. In the event of a debit card theft, the victim may only find out after the money has been withdrawn from the account. Should you be aware that your debit card is lost or stolen, you can take action. The Electronic Fund Transfer Act gives you the right to dispute an error on your bank statement and gives you some protections. For unauthorized card purchases, your liability is capped at $50 if you notify your bank within two days of realizing your debit card is missing. But between two days and 60 days, you could be responsible for paying up to $500 of a crook’s spending spree. If you wait more than 60 days to contact the bank, you will be stuck paying every cent of the unauthorized charges, which could cause you to lose everything in your checking account.
Paying by debit is quick and easy, and will not result in you paying any interest. However, as mentioned earlier, debit card users do not experience the float enjoyed when making a check or credit card payment. When making debit card payments for large purchases, it is best to do so at a store that allows you to thoroughly inspect the merchandise before buying. Also, large purchases may need to go on your credit card due to the fact some debit cards carry a maximum daily spending limit. Finally, credit cards remain preferable for ordering merchandise over the phone or the Internet, as they allow the consumer greater recourse in case something goes wrong.
See related: 10 places NOT to use your debit card