Credit cards vs. debit cards
As banks roll out debit cards in the UAE, we look at the most prudent answer to the question, ‘credit or debit?’
With credit cards, you can buy now and pay later. That means that your money stays in your bank account, earning interest until the bill comes due. It also means that you can be more flexible with spending, making a purchase long before having to part with the cash. But fail to pay your bill in full by the due date, and you’ll quickly blow anything you may earn in additional interest. Carrying a balance can cost you interest of 18 percent or more.
When you make a purchase with your debit card, the amount is deducted from your bank account immediately. This can be a good thing if you’re undisciplined with your spending and tend to ‘swipe now and worry later.’ But for the financially savvy, the grace period of credit card offers more flexibility with your monthly cash flow.
In many parts of the world, credit is the clear winner here, as cards often come with additional perks. One of our favorites is upgrades to the manufacturer’s warranty when you use your card to buy. Look for credit cards that extend the warranty period or offer additional product protections that are not conveyed by the basic guarantee. This can be a significant advantage on pricy items like electronics and appliances.
Debit card issuers are starting to get competitive with their perks, but generally, they can’t match the type of warranty upgrades that credit cards offer. In Lebanon, for instance, most banks’ debit cards do not carry the “purchase securities or warranty services” of credit cards.
Many credit cards offer “cash back bonuses” – commonly, a 1-2 percent rebate of the total amount charged to the card in a given period. Some credit cards advertise greater rebates in certain categories – for example, 5 percent cash back on travel expenditure and for purchases of gasoline and groceries. Using your credit card for big ticket items or unavoidable recurring monthly bills can add up to significant cash rebates, provided you pay your bill in full each month.
Debit card issuers are starting their own rewards programs, but they usually can’t compare. In general, credit card issuers dangle more attractive perks in front of potential clients because they stand to make a boatload on customers who fail to pay their accounts in full each month. For this reason, credit usually tops debit when it comes to perks.
Used responsibly, the zero percent transfers can be an uncommonly good financial tool. Basically, credit card companies permit clients to transfer and carry a balance, interest-free, for a defined time period. Customers with good credit can find zero percent offers lasting 12 months or more. You save by transferring high interest loans to a zero percent offer. But beware the expiration date, when interest rates can skyrocket.
Debit cards are not designed as lines of credit, so cannot be used as a tool to escape high interest rate loans.
When you’re in the market for something simpler, credit cards take second place. A credit card means another account to monitor and another bill to pay – and late payments qualify you for late fees, hefty interest charges, and a hit to your credit rating. If you are burdened by too many bills to pay each month, think twice about using credit.
If you want to simplify your monthly bill paying, debit cards are the way to go. There’s no bill to pay at the end of the month, because charges are automatically deducted from your current account. If you’re prone to late payments, the debit card provides the convenience of going cash-free, without the worry of missing a due date. Some banks offer a text message or email alert when a debit transaction is made, to help you keep track of usage.
A lost or stolen credit card is a headache, for sure. In the US, federal protections limit your liability for unauthorized charges to $50, with many companies offering zero customer responsibility for fraudulent transactions. Some companies also provide associated services to clients with lost or stolen wallets – such as emergency card and cash replacement, and reporting the loss to other creditors.
Debit card liability for unauthorized use can vary, so check with your issuer. In the US, legal protection against fraud is not the same as that conveyed with credit card use. In the US, failure to report debit card loss within two days can increase customer liability to $500 or more, depending on the time it takes to notify the issuer of the loss.
If you don’t pay off your credit card bill every month, you’re not alone. A recent survey of Arab youth found one in four young people are in debt – many of them to credit card companies. For those trying to reduce debt or manage overspending, credit cards may offer a little too much freedom. Unpaid interest and late fees can spell disaster for your resolution to be fiscally responsible.
The built-in discipline of debit cards can help shopaholics reign in the temptation to exceed their budget. While credit cards offer you a choice about paying your balance each month, debit cards are “pay-as-you-go”. The advantage is that you are forced to live within your means, buying only what you can afford at the time. Debit cards don’t offer you the option of paying later, so there’s no chance of accumulating mountains of debt, interest and fees.
In many markets, credit card companies report your payment history to national credit reporting agencies, which then use the information to a generate your credit score. Strong credit scores help qualify you for bank loans and other extensions of credit – including home mortgages and auto loans. Conscientious credit card use can help you build a record of fiscal responsibility. While credit reporting agencies are still in their infancy in the Middle East, this is still something to bear in mind.
Debit card use is not generally reported to credit bureaus, so won’t help boost your credit rating.