Sunday, January 20, 2008

Is Credit Card or Debit Card better?

Are they the same? Yes, they are the same physically – a piece of plastic but they serve different purpose. If so, what are their differences? Which one is better?

Credit card is for you to buy things without paying first. The bank will pay for you first and at the end of the month, you pay back the bank. You can decide to pay back the bank in full or partial. When you pay bank the in partial, you basically owe the bank. You’re actually taking the loan from bank. So the bank will charge you the interest based on the amount of loan you borrow.

Debit card on the other hand is for you to buy things with the amount of cash that you have in your saving account. Unlike the bank is paying for you, you’re actually paying yourself for the things that you buy and the money is deducted directly from your saving or current account once you swap you card.

In my personal opinion, the following factors determine whether you should choose credit or debit card.

(1) Which one is more convenient?

I owned a debit card before (VISA Electron) and it seems like the problem with that is not well accepted in a lot of places. Debit cards it not widely accepted as popular as credits card. However, this is probably only happen in Malaysia. When I traveled to US last year, debit card seems like as widely accepted as credit card. Not only that, I can use the debit card as an ATM card to withdraw cashes without any extra charges.

(2) Which one has reward points?

Does debit card have a reward points system? Not that I’m aware of. One of the reasons I choose credit card over debit card is because of the reward points. You can collect points when you spend your money with the credit cards and you can redeem the points for cash or other stuff. So far, I have redeemed the cash and 6 months prepaid phone card. I love this reward points system.

(3) Which one has cheaper fees?

I have been using credit cards more than 5 years and I haven’t paid them a single-cent. Just call them to waive the fees or cancel your existing card and apply for the new one with promotion. Usually the promotion will give you free annual fees. Some even give you free for life time. As for the debit card, I think the fees should be free as well.

(4) Which one is better control of your finances?

People says using debit card can gain more control of your finances because you can’t spent the money more than what you have. My belief is that if you can’t control your own finance, no matter what cards you’re using, you will end up with trouble (e.g. overdraft facility in your current account). Using the debit card is just an excuse. If you can control your own finance (aware of your spending), it is really doesn’t matter that which card you’re using. As long as you can use credit cards wisely, I don't see there is a problem with that.


Has anything that I left out? I personally prefer credit card because it is convenient and I can used it all around the world. Not only that I don’t need to pay for the fees at all, at the same time I can enjoy the reward points. If debit cards can fulfill all these requirements above, I don’t mind using it as I’ve already used the credit card as debit card or cash. I always pay my payment in full every month.

So for me, credit card is still a better choice for me at this moment. What is your choice?

20 Comments:

Jack Payne said...

In the U.S. it's credit cards, hands down, for being the most acceptable. A $50 loss limit applies. On debit cards there is no loss limit. If you have $30,000in your checking account, you could lose the whole thing.

Good luck to you in you goal to have financial independence at age 40. Mine was age 50. I achieved it at age 49 and 50 weeks. Two weeks before my 50th birthday I retired.

ChampDog said...

Hi Jack, thanks for sharing the information. When I was in U.S, I was using a debit card which is acceptable in most places as long as the merchants accept credit cards. Well, I guess credit cards should be more common than the debit card too.

Btw, you mean $50 or $50k? I thought the loss limit depends on the individual? It based on the individual income and each of us has a different limit?

Wow, great to know you have already achieved financial independence. It looks like now you're now enjoying your life. Are you making it through books selling?

I don’t aware of there are so many con mans in U.S as well. :) Great information that you provided in your blog.

Michael Tsen said...

credit cards are great to be kept, its like an instant borrower for me when I need it. For example, entering hospital with a signed credit card means instant curing process.

using credit card on a daily basis could be a trap .... no matter how discipline you are, you may still be trap once in a while ... :D

Debit Card is for those who are not qualified for credit card yet.

I do not see any use of debit card at all unless one day they offer higher compound return rate than FD, then may be its worth while.

HerEveryCentCounts said...

I use debit cards for most of my expenses. I just don't trust myself with a credit card. My inability to pay bills on time quickly outweighs the rewards programs.

ChampDog said...

@Mike,
I think you are right. Credit card is useful especially for emergency cash (e.g. admitted to the hospital). Debit card may come into problem if you do not have enough cash in your accounts. I left this factor out. I agree, for those who are not qualified for credit cards, it leaves them no choice to get the debit card instead. This is especially true for those do not have permanent job.

@hereverycentcounts
Thanks for sharing your experience. If you can’t really control your spending, debit card is the only way to go. Ya, I agree that sometimes spending is really quite fun and enjoying. But in my opinion, we have to somehow learn how to control on our spending rather than using the debit card to force us to control our spending. It should be done in proactive way rather than reactive way. Using the debit card to control our spending is a reactive way. I of course also agree that sometimes as what Michael mentioned that no matter how discipline you’re, you will still be trap once in a while. Well, we know our best what is the best choice for us. For me, I still believe using credit card still a better choice because I believe I know how to control my spending. Hopefully I won’t fall into trap even in a while at all. :)

cozuni said...

I applied for a debit card for Paypal transcation. As for credit card, I'm yet to qualify.
Do they charge extra for ATM transaction by using debit card? I never tried it before with ATM because I've lost my debit card PIN number on the day when I received my card.

ChampDog said...

I'm not sure about that in Malaysia. I think it shouldn't have any charges. I have never tried that before. Maybe once you confirm, you can let me know. But previously I used Bank of America debit card in U.S is free of charges.It is exactly like using the ATM card. :D

imDavidLee.com said...

personally will like debit card much expecially ecosway Alliance debit card...u can used the point to bid for ecosway auction which held 3 month once...

in term of security, debit card done a good job oso..u no need worry much when u don intrenet transaction..

ChampDog said...

It looks like now debit card also has some kind of reward points. :) Thanks for sharing the information.

As for the security, do they give you call if you purchase something expensive? I kind of suspect if you use debit card, they won't call you or alert you but credit card does. If you look at it from this perspective, isn’t it the credit card has better security? Unless your saving account has very little money, this may not border you.

imDavidLee said...

but they only just spend as how much inside ur debit card instead of spend
as much as can in credit card if lost of card and not have time to do cancellation..

www.imDavidLee.com said...

wat i said just now is in term of security..

ChampDog said...

Oh I see. I got your point. :)

shannon said...

i think, with my money, i would have a credit card ON HAND for emergencies only but NEVER use it. americans are famous for getting themselves into debt- and i don't see how it can be totally possible to become financially independent if you have a credit card statement to have. any place that will process credit cards will process a debit card, too. it isn't 100% necessary to even own a credit card; unless for your own personal security when it comes to emergencies and large purchases.

Tyson said...

I agree. The best thing about credit cards is rewards. Most consumers in US prefer cash back credit cards. However, those cards are for consumers with good credit only. The biggest problem with credit cards is that you have to be approved for one. And today with all that banking crisis going on it is even harder to get approved. There are too many people thta do not make their mortgage and credit card payment.

iCalvyn.com said...

credit card is suitable for those who can manage and control their spending, wheres debit card can control those can't control their spending behavior

ChampDog said...

iCalvyn, I agree with you but for those won't can control their spending, maybe it is time to learn. :)

Jenny said...

Well, most Amrican haven't. Here is an article on credit card debt http://www.credit-land.com/news/news_page_68129_1790476_79.php
Well, we'd better learn fast or will be in big, big trouble...

ChampDog said...

I think we should understand that in long term (due to the high interest charges), it is actually not worth it. If really want to show off, do it without debt. :D Thanks for the article.

jamy said...

I don't see why not ? "americans are famous for getting themselves into debt- and i don't see how it can be totally possible to become financially independent if you have a credit card statement to have."

It is a matter of exercising self control. One evening one of the credit card companies called us up, wanted to increase our credit line to 100k. We turned him down, he could not understand why we turn credit offer down, I told him, why on earth I want a 100k credit for ? I don't use it and don't want it. He was really upset with me.

To me credit cards, debit cards, check books , cash are all monetary facilities/tools. All of them work in a different way. I have a few credit cards, I do use them and I have debit cards, I use them at merchandise when I want to get some cash, I use my check book when the merchandise only take cash or check. It does not matter what kind of cards.

Credit cards companies will never get my interest because I pay before my due date ( I set alert mail), I only use debit card when they don't impose any charges, and I use check when other form payments are not acceptable and when all else fail, I use cash.

All these facilities are mean to work for you not against you.

I laughed when I see courses sprang up in America all over about how to consolidate debts, how to blar blar about money management.

My simple solution to a complex problem is plan your shopping , have a budget, (no need to be so rigid that you are a slave for your plan, be reasonable to yourself, treat yourself when rewards are due), thrash every junk mails that come to your door.

Stop going window shoppings, stop going festival season sells. Buy things you need even if it mean branded goods and that is ok if it last longer and not some junks from China Mart (Wal-Mart). Buy things that last, shop less frequently and have a planed shopping habits.

Change your mentality from accumulating debts to acquire assets, then you don't even have time to spend the assets you have acquired !

An old fart who is constantly acquire assets.

Js

ChampDog said...

An old fart who constantly acquires assets? Hahaha… I agree with most of your points. Just want to give some comments on “Stop going to festival season sales”. I have different thought. I think we should shop during festival season sells because you can buy things with a lot cheaper with the discount they give. However, of course we don’t buy extra unnecessary stuff just for the sake of the discount. For the things that I want to buy, what I usually do is to wait for the offer. Yes, I got your point too because many people usually end up buying more stuff which are not necessary during cheap sales. For electronic component, I usually wait for the new models then I only buy the previous models. You could actually get half price out of that. :D


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