With cash now relegated to smaller purchases and “just in case” moments, cards really are king when it comes to spending money. Recent research indicates that more than half of all consumers carry less than $50 in cash, but have at least two cards on hand.
Cards, in many ways, just make more sense. Compared to cash, credit cards and debit cards offer flexibility, convenience and security against loss or theft (in that you can actually get your money back if you lose a card, as opposed to cash). Meanwhile, the introduction of contactless or “tap-and-go” payments has made it faster and easier to get through the checkout in a wide range of stores.
But while the question of “cash or card” is becoming less relevant, it is being replaced by questions around debit and credit. Most people have at least one credit card and one debit card in their wallets, but that does not mean they should be used interchangeably.
So when you are asked for a card, which one do you choose? In some cases, using a debit card offers many more benefits, while at other times credit may be the best choice. To help you figure it out, this guide provides insights around five common spending scenarios and looks at the pros and cons to paying with credit or debit card in each situation.
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Introduction
Grocery shopping
Groceries are the biggest “essential” expense after housing, with the most recent data from the Australian Bureau of Statistics indicating it makes up 17% of what we spend each week. In 2009/10, that worked out to be $204.20, but prices have risen significantly since then.
When it comes to paying for groceries, the choice between debit and credit depends on your goals. Grocery shopping costs usually vary – particularly with more people doing grocery shopping over a few days as opposed to once a week. So if a credit card was used, the erratic nature of this expense could make it hard to keep track of the balance, which would make debit a smarter choice.
Grocery shopping is also an essential expense, which means using a debit card that’s linked to the account holding your wages will help you keep track of your everyday spending.
On the other hand, using a credit card for groceries can be a great way to get more reward points. If you had a card with a reward program offering one point per $1 spent, for example, you could earn around 10,618 reward points in a year just by paying for your groceries with plastic. And you could get even more points if you had a credit card linked to the Coles flybuys or Woolworths Everyday Rewards programs.
But it is worth noting that the majority of reward cards come with high annual fees, so it is important to make sure you spend enough to offset the annual fee and any interest that you pay if you carry a balance.
Dining out
Australians spent an average of $32 a week on meals in restaurants in 2012, according to research from MoneySmart. When you factor in drinks and other extras, as well as a rise in costs, you could easily be looking at $50 or more per dining experience.
The reason for dining out, though, can influence how you pay for it. Let’s say, for example, that you are having dinner with a couple of friends and splitting the bill between you. Using a debit card would help you keep track of your spending and your budget, while reducing the risk of adding to existing credit card debt.
On the other hand, if you are taking a colleague out for a business lunch and pay for the whole thing, a credit card could make it easier to foot the bill and to claim it as a business expense (where relevant).
In general, it makes sense to put smaller charges on your debit card so that you can keep track of your credit card balance and make it easier to manage your everyday budget. Using credit for bigger bills, on the other hand, could help boost any rewards balance or at least make cash flow less of an issue.
If you charge too much to your debit card and end up with an “insufficient funds” message, you could also end up with bank or service fees on top of the meal costs. When it comes to credit cards, however, remember that some places may not accept all cards and others could apply a surcharge – which is particularly common for American Express cards.
Consistency is another strategy to consider when choosing between credit and debit cards for dining. If you can use the same card for all or at least most of your dining expenses, you will be able to go through your statement at the end of the month and add up exactly how much you spent on meals. In turn, that can help you create a more accurate budget for your spending and even help you save money in the long run.
Major purchases
If you have a credit card, chances are good that you use it pay for major purchases such as furniture and whitegoods. But is that a good way to do things?
The short answer is “yes”, but there are exceptions that we’ll get to in a bit. First, let’s look at the benefits of using credit for major purchases. The most obvious is that it allows you to buy something worth thousands of dollars when you need it (rather than saving up for the same thing).
If you have a card with interest free days (and meet the eligibility requirements for them), you could be able to pay off the purchase over a 30, 44 or 55 day period without paying any interest. Big Bank NAB has a good example of how this strategy can work for someone wanting to buy a new couch but not pay any interest on the purchase.
Another benefit to using credit cards is that you could get access to things like purchase protection insurance, extended warranties and best price guarantees – common complimentary extras that are not really offered with debit cards.
But, as mentioned before, there are also reasons not to use a credit card. If you already have a balance on your credit card, or if you have enough savings to buy what you need, then using debit can save you the risk of even more debt. Basically, if there is a chance that you will end up carrying a balance for months and months by using credit when you could use debit, opt for the latter instead.
Travel
Both credit cards and debit cards have a place when it comes to travel. On the one hand, credit cards are useful for any unexpected costs that arise and make it easier to manage authorisation holds some travel companies use during the payment process.
Depending on the credit card, you could also be eligible for complimentary travel insurance when you pay for a trip on the card. This benefit in itself is often enough of an incentive for people to pay with credit, but just make sure the insurance covers everything (and everyone) you expect it to if it is your main reason.
Credit card debt is the biggest drawback to using a credit card for travel. As well as dealing with the balance of whatever purchases you have made, there could be additional fees and currency conversion costs that make it harder to deal with the debt as soon as you get back.
When it comes to currency conversion, however, debit cards often apply an international transaction fee as well. There are exceptions though, such as the Citibank Plus, which has no fees for anything.
Beyond international transactions and currency conversion, debit cards can also help you stay accountable to what you spend and make it easier to stick to a budget when compared to credit cards.
There are also a growing number of multi-currency prepaid debit cards available, such as the Qantas Cash card, Virgin Global Wallet and the Commonwealth Bank Travel Money Card. These debit cards take the hassle out of currency conversion and have the potential to save you a lot of money as a result.
When it comes to travel, there are degrees of convenience and practicality for all of the payment options available. But in general, it is best to have several different cards and even some cash on hand so that you have a payment option for any situation.
Bills and service fees
There are many ways to pay for bills and service fees, including with a debit card or credit card. But it is often with bills that the differences between using credit and debit really show up, with many companies applying a surcharge to credit card transactions.
Telstra, for example, currently has a 1% surcharge for MasterCard, Visa and American Express transactions, and 2% for Diners Club. Electricity company Synergy, on the other hand, has a surcharge of 0.53% for MasterCard and Visa transactions, and 1.68% for American Express.
To put this fee into perspective, if you had a Synergy bill worth $600 and chose the “credit card” payment option, you would be charged an extra $3.18 or $10.08 for paying off the bill.
Depending on your issuer, credit card payments for bills and other service fees could also be considered a “cash advance” or “cash equivalent” transaction. As GE explains on the 28degrees MasterCard website, these transactions are: “made through bill payment facilities where the supplier or financial institution does not accept direct payment by credit card (for example payment of bills through a third party or over the counter at a financial institution).”
If that is the case, you could end up paying an extra 3% for using your credit card and have interest charged at a higher rate. Usually this fee does not apply if BPAY is available, so make sure you check what payment options are available and even ask your credit card issuer if you are unsure.
It is also worth noting that surcharges can apply to any card that uses the networks specified, so if you had a Visa debit card and opted to pay in this way, you would still be charged. Where debit cards differ, however, is with other payment options. If you have a debit card account, you can choose to pay by direct debit or bank transfer, avoiding fees in the process.
With all of these things to consider, it is a good idea to read the fine print for any companies that you have bill payments with so that you know what fees could apply. And if you choose to pay with a credit card, make sure you know whether or not your issuer considers it a cash advance transaction.
Conclusion
Debit cards and credit cards are often seen as interchangeable pieces of plastic, and used similarly as a result. But the different features they provide can make credit or debit better suited in a range of situations.
Credit cards, for example, often have added benefits like complimentary insurance and reward points that help give you more bang for your buck. The trade-off, however, is the risk of a balance, interest charges and other fees.
Debit cards may not come with as many added perks, but they do offer direct access to your actual money, rather than a borrowing facility. It is also easier to avoid surcharges when you have a debit card, but could be harder to deal with big expenses or unexpected costs when compared to a credit card.
What the above scenarios and examples really show is that when it comes to using a credit card or debit card, often it is just a matter of personal preference. But whatever card you decide to use, putting a bit of thought into the decision helps you get the most out of your money in every situation.
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