Choosing to use a Debit Card

There seems to be more people carrying credit cards. And I even met people who think a debit card is far inferior than a credit card.

I look at debit card as another financial tool for managing personal wealth. And I don’t agree it is inferior than a credit card. Each has its place and neither is more superior than the other.

So, why would anyone consider a debit card?

1) It works like a credit card

A debit card behaves very much like a credit card in many circumstances. You can use it to pay for gas, restaurant bill, book ticket online or buy stuffs from eBay.

2) It does not accrue interest

Unlike credit card, a debit card is linked to your bank account. How much you can buy is limit by how much money you have in your bank account. As such, a debit card does not accrued interest the way that a credit card does.

3) Not affected by bad credit

A debit card is the perfect option for credit constrained consumers. Since it is linked to your bank account, the card company know you won’t spend beyond your mean. It is very difficult to get into debt with regular use of debit cards.

However, a debit card is not without its flaws. Here are a few drawbacks of a debit cards:

1) No grace period

There is no grace period for debit card. This means money will be deducted from your bank account when you made the purchase.

2) Not helpful for credit building

Since a debit card does not utilize any credit, there is really no impact on your credit history.
However, if you overdraw your bank account and subsequently face a problem in paying back the amount, the negative record will be reflected in your credit report.

3) More vulnerable to fraudulent charges

This is perhaps one of the biggest drawback for debit card. Since the card is directly linked to you bank account, anyone with access to your debit bank and empty your bank account quickly. And it takes much longer and more effort to recover the money.

A credit card does not have this problem because it is based on credit. As such, credit card companies have measures in place that reduce the risk dramatically as well as protect the credit card owner.

I advocate having both types of cards if possible. Use the credit card to build your credit history and purchasing items over the Internet. Do pay back in full for whatever balance you have at the end of the month.

For daily use(grocery shopping, phone bills,etc), a debit card will suffice. It’s almost like instant cash and you do not have to carry a lot of cash around. To reduce the risk of using a debit card, consider opening another account strictly for debit card usage. Deposit a fixed amount ($200, $300, or whatever) every month so that the amount you could potentially lose is very small and will not affect you adversely.

If you do not wish to open another bank account, consider prepaid visa cards. An example is the Wired Plastic Prepaid Visa card. Click here to check out this prepaid card.