Credit card versus debit card – which is best for Kiwis?

News that New Zealanders are leaving their credit cards and chequebooks at home in favour of debit cards has met with mixed reaction from financial experts, but there is no denying that since their introduction to New Zealand more than seven years ago, debit cards have enjoyed steady popularity and increasingly people are weighing up the merits of credit cards versus debit cards, but is it really a case of one is better than the other?

Most people are comfortable that credit cards are almost universally accepted, whereas the new nature of debit cards may give rise to questions like:

• ‘How secure is my money with a debit card?’
• ‘Can I use my debit card overseas?’
• ‘Do hotels accept debit cards?’ and
• ‘Is a debit card a smarter financial choice?’

The answer to those questions and the big one, “which best, debit card or credit card?” actually depends on your own personal circumstances, personality and needs. To help you make an informed decision, it is necessary to examine the characteristics of both cards first.

The debit card

The chequebook may be dead, but the debit card is like a digital version – linked to your bank account and debited from your account at the moment the transaction occurs. It is however designed to look like, and function like, a credit card.

Be aware that some retailers may apply credit card fees to debit cards, and your bank may also charge you an annual debit card fee. In addition, other normal transaction fees may apply, depending on the nature of your account. Debit cards are usually associated with either a cheque or savings account.

For example, if your bank account offers a cheque book with the account (a cheque account) – which you may not really need if you have a debit card – it may charge a monthly transaction fee on that account, compared to a savings account that does not offer a cheque book and does not charge a monthly account or transaction fee.

Unlike a credit card however, you will not have to pay fees or a higher interest rate to use your debit card to withdraw money from an ATM because the money is yours and is not classified as a cash advance from a lender (fees and interest apply to ATM transactions on credit cards because they would normally be defined as a ‘cash advance’ transaction).

• You may spend only the money you have on the balance in your account. It is your money.
• A debit card is usually connected to a cheque or savings account.
• There are no monthly interest payments to make and no debt, because you are not borrowing the money – although account and transaction fees may apply.
• Most financial providers will not require a credit check for a debit card.
• You can do ATM cash withdrawals and EFTPOS (electronic fund transfer at point of sale) transactions anywhere in New Zealand.
• Make online purchases from retailers anywhere in the world.
• Make phone and mail order purchases.
• Most debit cards will come with microchip technology protection.
• Use the debit card like a credit card when overseas, though differences and conditions may apply depending on your provider.
• It’s always best to check with your financial services provider to find out what you can, and cannot do, with your debit card.
• So long as your debit card is Visa or Mastercard, it should be accepted anywhere a credit card is accepted.

One of the advantages of a debit card is that some merchants will offer discounts for cash or debit cards because they do not have to pay transaction fees – called an interchange fee – to credit card companies like Visa and MasterCard.

A disadvantage with debit cards is that if you have a dispute with the merchant, it can be more difficult to get your money back because it has already left your cheque or savings account. It may not be a lost cause, but it can certainly be trickier to get your money back or to withhold payment until the dispute is resolved.

The debit card is a growing favourite of budgeting organisations and consumer credit groups who are worried about the rising levels of Kiwi debt.

Family Budget Services chief executive Raewyn Fox says that debit cards are good budgeting tools because they force people to spend the money they have, without the worry of interest repayments that follow credit cards – with one caveat, and that is to make sure you are not paying more in fees than you might with a credit card.

However, this does not mean the debit card is a budgeter’s best friend. Consumer New Zealand points out that if you pay off your credit card each month, there may be no real benefit from switching to a debit card.

“You’ll lose the interest-free period on purchases that you get with a credit card.”

In other words, a debit card is preferable to a credit card if you have difficulty controlling your spending or if you are struggling with interest payments and penalties as a result of missed credit card payments and or other financial setbacks.

The credit card

Credit cards offer a line of credit that is interest free provided the amount you borrowed is repaid when it falls due. It is linked to the card provider (a third party other than you and the merchant with whom you are transacting). In essence, it is the card provider who issues the cash to whoever you have paid the money to.

Credit cards usually come with a limit, which is the amount of credit your financial services provider is willing to extend towards you (this depends on income, credit history and other factors which may vary according to your provider).

Normally credit cards will have an establishment fee (a one off charge to accompany your application), as well as annual account fees, an interest rate which is applicable to any outstanding balance at the end of any interest free-start-up period, a cash advance fee and associated cash advance interest rate (for when you draw cash directly from the card), late payment penalties, and merchant and international transaction fees (due to the interchange fee regime) may also apply.

Come credit cards offer cash-back and rewards, which allow you to accumulate air points, spending points with selected retailers and get cash back rewards. However, cards that offer rewards and cash-back schemes may not always be the best option, because any returns may be cancelled out by higher fees and interest rate charges (than those charged by some credit card providers who do not offer rewards).

Credit cards are based on money (credit) extended to you by a lender, which is expected to be paid back in full within a certain time period. In New Zealand this repayment period varies between 44 days and as much as 180 days from GE Money’s Gem Visa card – it is important to always check the terms and conditions of your credit card provider. Assume nothing.

Other characteristics of credit cards include:

• Interest and fee payments are required regularly, usually monthly. Missing your payment date will incur additional interest rate charges, fees and penalties (which vary from provider to provider).
• Obtaining a credit card depends on your credit worthiness, income and other factors that may apply.
• Your spend is limited to the amount of credit your provider has authorised. The credit limit may increase over time in accordance with how well you manage your credit card, or you could ask for more.
• Credit cards will come with microchip technology protection.
• Credit cards also come with perks, including cash-back and rewards and, in some cases, travel insurance.

Cash-back and rewards, insurance cover and an interest free grace period makes credit cards an attractive choice over debit cards if you have the necessary means and financial discipline to manage your credit card responsibly.