Risks and Rewards of Using Debit Cards and Credit Cards

Most of us carry both debit and credit cards in our wallets and we usually don’t put much thought into which card to swipe at the cash register. However, there are potential risks and rewards behind these decisions. Here are some considerations regarding the risks and rewards of debit cards and credit cards.

Using your debit card can cost you

If a fraudulent purchase is made with your debit card, it may be more difficult to fight than one made with a credit card. According to the Electronic Fund Transfer Act, banks can hold you liable for up to $500 if the fraudulent charges are not reported within two days, and if the charges are not discovered within 60 days after the statement is sent, you can be held responsible for all of them! Based on Javelin Strategy & Research’s 2010 study, consumers lose over $750 in an average case of fraud, and they spend roughly 28 hours making phone calls, dealing with their bank and filing police reports to get the problem solved.

On the other hand, The Fair Credit Billing Act affords credit card holders better protection. Your maximum liability for fraudulent credit card purchases is $50, no matter when you discover it and usually a phone call or two to the credit card company solves the problem. Additionally, to strengthen the security of credit cards, companies are rolling out cards with tiny microprocessor chips where your personal data remains encrypted when you swipe your card. These cards, commonly known as smart cards, come in two forms – ones that require signatures and ones that require pins to process purchases. Since signatures are forgeable, cards requiring pins tend to be more secure. In fact, in the UK, the introduction of smartcards led to a 36% drop in credit and debit card fraud from 2008 to 2012. Credit card issuers in America have accelerated their adoption of smart cards. If you call your existing credit card issuer, they may be able to replace your current card or offer you a different card that has this technology.

Credit cards can be “rewarding”

Many credit cards offer sign-up bonuses, reward points for dollars spent, cash-back, and assorted other points and credits. These can translate to real dollars in your pocket if you choose the right card and you know how to maximize the rewards. a word of caution though: some reward programs have so many restrictions and conditions that cardholders reap only a fraction of the rewards. Worse, many credit card users get sucked into spending more than they otherwise would just to satisfy the demands of their rewards or cash back programs! This is not by accident. Credit card companies earn most of their revenue (about $100 billion a year!) from interest charges and fees, and many of them skew their benefits and rewards to maximize that revenue.

Evaluating rewards programs

Reward programs vary widely, and so evaluating the benefits is a key consideration in the selection process. Credit card companies’ online reward portals have evolved over the last few years. Some of the most robust portals are Chase Ultimate Rewards, Amex Membership Rewards and Citi ThankYou Rewards. They allow you to use your points to book travel, buy gift cards and shop at online retail stores. In enhanced versions of the portals, you can also transfer your points to their approved transfer partners, mostly airlines or hotel chains. Each portal partners with a different list of reward programs and depending on your travel habits, one might be far more valuable than another. By taking some time to fully understand a credit card’s reward system, you might find it more fun than frustrating when redeeming your points. For more information on the types of rewards cards available and current offers, you can visit sites such as creditcards.com, thepointsguy.com, and millionmilesecrets.com.

A word of caution about revolving credit cards

While credit cards have some obvious advantages over debit cards, they can be risky in a different way: they may encourage you to build a “revolving debt balance.” The interest rates on revolving credit card balances are often in the double digits, and can go above 20% for things like late payments. If you allow the balances to accumulate, the interest you pay often outweigh the rewards you may receive. Additionally, credit card benefits and annual fees change frequently, so it’s best to review your credit cards annually and confirm that they are still appropriate for your current spending needs.

If you have further questions about revolving debt or the risks and rewards of debit cards and credit cards, please contact our team at Blankinship and Foster.

About Monica Ma

Monica Ma, CFP®, CFA® is an advisor and the chair of the Investment Committee at Blankinship & Foster LLC. She helps clients build sound investment portfolios and develop strategic plans to reach their goals. Since Monica is passionate about sharing her knowledge with women and retirees, she co-leads the firm's Wise Women and Living Wisely Educational Series. Monica is a member of the International Community Foundation's Investment and Finance Committee. She has been living in San Diego since 2008 and enjoys travelling and cooking with her family.

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