Debit Versus Credit Cards
Brent C. Diefenderfer
When you are pulling out the plastic to make a purchase, will it be debit or credit? It makes sense to know how each works, and their respective advantages and disadvantages. The bottom line is that debit cards are fine for small and/or routine purchases, but credit cards, as a rule, are better for major purchases and online transactions because they offer enhanced protections to the consumer.
A debit card is like an electronic check—the consumer is spending money that he or she already has in their bank account. As compared with credit cards, debit cards carry the potential for greater liability if the card is lost or stolen. Under federal law, liability is limited to $50 for the fast‑acting consumer who notifies the bank within two days after discovering an unauthorized transaction. After that, the cardholder could lose up to $500, or even more in some cases. In most cases, the consumer will not notice the theft until it is too late. On its own, a bank may choose to waive liability for unauthorized transactions if the consumer has taken reasonable precautions, but, of course, this varies depending on individual bank policies.
For transaction errors, banks, as a general rule, have up to 10 days to investigate after receiving notice from the cardholder, or up to 45 days in special circumstances. Pending the outcome of the review, banks generally must credit the account for the amount of the alleged error.
As with credit cards, debit cards offer convenience and an alternative to carrying cash. But, unlike credit cards, the consumer is not taking on debt when using a debit card. Nor is the consumer paying interest or an assortment of fees, assuming that the account is not overdrawn. It may be possible to avoid even the overdraft fees by linking a checking account to a savings account or a line of credit. A debit card can also be used to obtain cash without incurring charges that usually come with cash advances by means of a credit card.
When there is a problem with purchased merchandise, there is no right to withhold payment if the consumer has used a debit card, as might be an option with a credit‑card transaction. Another drawback for debit cards is the practice of putting “holds” on funds. If the final amount is not yet known, a merchant may place a temporary hold on funds for more than is actually spent, which denies the consumer access to that amount until the hold is lifted later.
Federal law limits a consumer’s losses to a maximum of $50 if a credit card is lost or stolen, and also provides protection against credit‑card billing errors. Unlike with debit cards, federal law also may allow the user of a credit card to withhold payment under certain circumstances until a problem with purchased merchandise is rectified. Recently, the CARD Act (Credit Card Accountability, Responsibility and Disclosure Act) added additional protections for consumers such as grace period on interest rate increases and limitations on certain fees and charges. Click here for additional information on the CARD Act.
The most commonly cited drawbacks for credit cards concern fees, interest rate increases, and penalties. In addition to annual fees for some cards, there are usually fees for paying late and for exceeding the credit limit. Of course, unless a consumer is in an interest‑free grace period, interest accumulates and adds to the overall debt, especially if the cardholder pays only the minimum amounts due each month. As any holder of a credit card can attest, having a credit card also makes overspending very easy, especially with high credit limits and enticements such as rewards programs. Faced with the loss of employment or other unforeseen circumstances, many consumers find themselves faced with the inability to pay credit card debt and must resort to protection under the bankruptcy code. For questions or additional information, contact Attorney Brent Diefenderfer of CGA’s Debt Restructuring and Bankruptcy Law Department.