Credit vs Debit? What's best for you?

Credit vs Debit? What's best for you?
There is one fundamental difference between credit cards
and debit cards. With credit cards, you can use the card
issuer's money now and pay it back later. With debit cards,
you use no one else's money but your own. What is the best
one for you?

Credit Cards:

Credit cards essentially provide you a revolving credit
line, accessible and available on demand, and payable every
month, either in full or partially. The credit card issuer
sets a spending limit which you should not exceed, under
pain of stiff penalties and high interest charges.
Normally, those who pay off their entire balance due for
the statement period are not charged any interest. Credit
cards do not remove your need to use money; they merely
delay your parting with your money until the time comes to
pay the card issuer.

Debit Cards:

Debit cards work like, and are usually linked to, your
checking account. It is also possible to link debit cards
to other types of deposits, e.g. mutual funds or savings
accounts. In that sense, debit cards are ATM cards. In the
1990s, the largest credit card brands arranged with banks
to "co-brand" their ATM cards, so that you now have
MasterCard and Visa debit cards. This is very convenient
when you make purchases because, like their credit cards,
MasterCard and Visa debit cards are accepted in millions of
establishments worldwide. Used in this manner, debit cards
function like paperless checks. The card issuers do not
extend you credit when you use debit cards; it is your
money that pays the merchant, taken immediately from the
linked account.

Other features: - Debit cards can be used only with a
personal identification number (PIN), making them more
secure than credit cards, in case they fall into the wrong
hands. However, you may now arrange for PINs on your credit
cards.

- Debit cards instantly reduce the money available in your
deposit account, while credit cards allow you to make
credit purchases at no interest (during the grace period).

- Since your account is instantly reduced by debit cards,
you lose the chance to withhold payment (e.g. for a
purchased item that later turns out to be a lemon), or, as
you would do when paying by check, order a stop payment.
Because of the lag in payment, credit cards allow you to
dispute bills or hold payment until the issue is settled.

- You don't pay any interest charges with debit cards,
unlike with credit cards. However, this is applicable only
to those who carry balances on credit cards. Those who
settle their bills in full every month also do not pay
interest.

- If you charge too many items on debit cards, you could
incur an overdraft. This exposes you to the risk of
overdraft penalties. If you exceed the spending limit on
credit cards, you are exposed to over-limit interest
charges and penalties.

- For those who use debit cards with care, you will realize
that they develop a sense of spending discipline that may
not be possible with credit cards.

Prudence may dictate that you should have both debit cards
and credit cards. With experience, you will be able to
determine the situations where it is appropriate to use one
or the other. Debit cards do give you the advantage of
built-in discipline, but there are times when there's not
enough balance in the bank account and you will have to use
credit cards to pay for the transaction at hand.

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Richard Greenwood is co-founder of The Click 4 Group which
runs a number of finance comparison websites including
http://www.click4credit.com.au which compare products
including debit cards and credit cards.