Debit or Credit?

We all know the difference between a credit card and a debit card: a credit card creates a loan on your line of credit, while a debit card transaction is taken out of your checking account.

Recently, I helped my daughter try and straighten out a mess that could have been avoided with just a little more knowledge. By knowing when to use a debit card and when to use a credit card (and by tracking her accounts more closely) she could have avoided the whole situation.

It all started when she decided she wanted to do a month's worth of tanning at a well-known tanning salon in Overlea. She went in to sign up, based on the sign in the window that proclaimed $10.99 for a month. Turns out that the offer was only for the first month if you signed up for a year. She went ahead with the full year, giving them her debit card for the monthly charges.

That was her first mistake.

Later in the day, away from the pressure of the salesperson, she had time to think about it. She had really only wanted the one month's worth of tanning to get ready for the summer and pool season. She went back to the tanning salon and told them that she didn't want the annual plan, didn't want them to charge her debit card and paid them a higher amount in cash for the one month plan.

Being young and a little inexperienced in managing her finances, she didn't monitor her account very closely. When she needed cash or to use her debit card, she simply checked to see that she had enough money in her account to cover whatever she needed.

That was her second mistake.

Happily tan after her month, she went about her business never giving it a second thought. Meanwhile month after month (at least when she had enough money available) the tanning salon was taking money out of her checking account. By the time she noticed the transactions, the salon had taken $120 from her account.  They refused to refund the money stating that she had signed the contract for a year (even though when we asked they could NOT produce a signed contract). It didn't matter what she said...their "system" said she had a contract until she came in to cancel it.

Because she had used her debit card there were no "charge-back" rights. The credit union could not reverse the charges from the salon for services not received. If she had used her credit card, the credit union could have charged back the tanning salon upon her written affidavit of what had happened. 

Lesson number one: Never use a debit card for recurring payments that you may have to stop at some point down the road. If the vendor involved does not stop the payments when you request it, you have little recourse if the vendor doesn't choose to honor your request. You should also avoid using your debit card for online purchases.  A credit card has much more consumer-friendly fraud and charge-back rules.

Lesson number two: Always monitor your account activity and review all the transactions on a regular basis (at a minimum when you get your monthly statement). In my daughter's case, she would have lost much less money if she had detected the problem earlier.

Debit cards are a great convenience for single purchases at reputable stores, restaurants and more. If there is clear-cut fraudulent activity (for example, if someone steals your card and uses it), you are not responsible for the charges.  Even when using your debit card, you should always choose the “credit” option and sign for the transaction.

Credit cards can be used with a high degree of confidence either online or if you plan to let someone charge your account on a regular basis. When you are young, it's more difficult to get a credit card, but there are options. If you are still in college, your parents can help you get a low-limit card for the times when you really need it (ordering pizza and beer with your card does not constitute a "need" :). If you are in the working world, you can begin establishing your credit with either a secured credit card or one designed specifically for young adults.

At Destinations, for example, we offer a low-limit "credit builder" card for those with no credit history.