Credit Cards vs. Debit Cards - Which Is Better?

Many of us know we have an option to use a debit card but don't take advantage because we lack knowledge or interest or simply are in the habit of writing checks. While checks, ATM cards and credit cards are fairly self-explanatory, many people fail to see much difference between a credit card and a debit card.

So is there a significant difference? And is one better than the other?

The way a debit card works is basically the same in most respects. You make your purchase, plug in your number or swipe your card and the purchase goes through. The merchant, again, will get paid by the company who issued you the debit card. Here is where the difference is. With a debit card the money already has to be in your account. In other words, you've already paid in a certain amount of money to be available to your debit card. By using the card the money is simply transferred out of your account and your balance is reduced until it reaches zero, at which time you have to pay more money into the account or the card can't be used.

Maybe you still don't see much difference, besides where the money comes from and when you have to pay up. So which one is better to use? It depends upon how careful you are with your card and why you are using the card.

The features that make debit cards convenient - instant access to your money, lack of a required PIN number and not having to drag out your photo ID when you use it - make fraud that much easier. Unless reported quickly, theft of your debit card can quickly devastate your bank account. This is where you begin to see the difference.

Credit card companies are held to strict liability laws; the law limits consumer liability for credit card fraud to $50. For example, if you notice suspicious charges on your credit card statement such as double billing or an incorrect charge, the credit card company is obligated to investigate if you send in a written request within 60 days.

Credit card fraud vs. debit card fraud

The law limits consumer liability for credit card fraud to $50. For debit card fraud, your liability is $50 if you notify the bank with 2 days of learning of the fraud, and $500 or more after two days, up to the entire amount stolen under certain circumstances.

Your debit card is usually linked to your checking account. If the thief drains it, he has already made out with your money, and you have to fight with the bank to get your own money back. Meanwhile, your other checks could bounce and you could face bounced check fees, negative marks on your credit reports, cash flow problems and other hassles. With credit card fraud, you simply fight with the bank about getting disputed charges off your account, not getting your own money back.

Discover, Visa and Mastercard have implemented “zero liability” policies that protect you against debit card fraud provided that certain (reasonable) conditions are met. While many debit card issuers offer the same protection against fraud as that of credit cards, it still means closing the barn door after the horse is already out. It may take some time to restore the funds to the account, unlike a credit card where the cardholder can withhold payment on any fraudulent purchases.