Ask LH: When Should I Use Credit And When Should I Use Debit When Shopping?

Ask LH: When Should I Use Credit And When Should I Use Debit When Shopping?
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Dear Lifehacker, When I’m shopping, I’m often presented with the option to use debit or credit when I pay. I’ve heard there are benefits to using credit, but aren’t there fees involved that can drive up the price or put a strain on the owner of the shop I’m in? When should I use which? Is there even a difference? Any insights appreciated. Thanks, Card Swiper

Photo by OtnaYdur (Shutterstock)

Dear Card Swiper,

There are indeed differences, though given that the vast majority of non-cash payments are handled electronically (you’ll only see a paper credit card form if the network goes down), the differences aren’t as pronounced as they used to be.

In Australia, there are essentially three distinct ways that you could pay for a transaction electronically using a card:

  • via EFTPOS, which draws money immediately from an associated bank account. This means you can’t spend money you don’t have (unless that account happens to have an overdraft facility).
  • via a credit card (Visa or MasterCard). This allows you to spend funds you don’t have and can have other benefits (such as frequent flyer points), but you’ll pay interest (either immediately or after a set period).
  • via a debit card (sometimes known as a debit credit card), which effectively uses the branding of a credit card (and its associated network), but draws on your own money in an associated bank account. If you don’t want to possess a credit card, a debit card gives you a means of shopping in retailers that only accept them (online stores being the most obvious examples).

In most contexts, EFTPOS and debit cards amount to the same thing; you’re using your own money. While historically using a debit card might have allowed you to use a signature rather than remembering a PIN, most modern cards also offer a PIN option. Visa is planning to make the use of a PIN compulsory for all transactions on its cards in Australia by March 2014, and MasterCard is expected to follow suit.

One key point: a retailer can choose to accept whatever payment mechanisms it likes. It is under no obligation to support any particular mechanism (credit card, EFTPOS or even cash). All of these methods have costs associated with them — EFTPOS and credit cards charge fees, while cash effectively creates a labour cost through the need to bank it on a regular basis.

Retailers are also able to impose a minimum transaction amount for any electronic transaction (the practice is banned by some individual bank merchant agreements but isn’t illegal as such). They can also charge an extra fee for using a credit card, though this must be clearly disclosed and can’t be excessive or unreasonable — it should reflect the cost of offering the credit card service, not be a source of extra income.

If a retailer imposes specific conditions, making the choice can be easy. If there’s a fee for credit cards but not EFTPOS, then EFTPOS is the logical choice. If you have a bank account which limits the number of free withdrawals you can make each month, then using the debit card option may make more sense. A case in point: Between 2010 and 2012, Woolworths blocked the option to use debit cards, forcing customers in that situation to use EFTPOS, a move that wasn’t wildly popular with some consumers. That policy was reversed late last year.

As we’ve mentioned, one area where debit cards can provide an advantage is online shopping. If a particular store only accepts credit and debit cards, then a debit card gives you a no-interest means of accessing that service.

Under most circumstances, sensible budget planning dictates not using a credit card. If you pay off your balance in full every month, a credit card won’t cost you anything extra, and you may enjoy additional benefits such as frequent-flyer points or extended warranty deals. However, you need to be realistic about these: the value of frequent flyer points can quickly be wiped out by interest bills, and Australian consumer law already gives you well-established warranty rights.


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  • I use my credit card when shopping, and every Monday I check how much I spent on it and pay it off from my cheque account. If I go over what I “can” spend, I note it for my next pay day, and my “allowance” for the next pay cycle decreases accordingly.

    I think you absolutely can involve a credit card in sensible budget planning – you just have to show a bit of restraint.

  • I pay for everything on a credit card – AMEX where I can, though oddly this article doesn’t acknowledge it’s existence – and have never paid one cent interest. I am a very frequent flier and the points get me upgrades on long haul flights. Unless you are also a very frequent flier, it is unlikely that this benefit will be worth the cost of the card (extra to have a 55 day interest free period).

    • I noticed that too. I also noticed no mention of Pay Wave, in particular ING who are still offering a 6 month 5% discount for new customers who make Pay Wave payments (so under $100). After the 6 month period it reverts to 2% if you make a deposit of $2,000 into the account each month. All of this with no fees. Even a 2% saving far exceeds any interest you may lose by putting extra money into a debit account.

  • The other bonus of paying by credit card is the potential for earning interest on your money. Send all your pay into a high-interest savings account (several institutions now offer this sort of account), and let it sit there earning you money while you use your credit card to pay for things. Keep track of your spending and pay it all off at the end of the month and you’ll be making money (provided you have a fee-free credit card, although there are several of those around as well).

    • Its good when you give out your credit card to other’s, they reimburse the money into your bank account = Profit! 😉

    • If you have a mortgage offset account, it’s better to hold onto your cash as long as possible before paying it off. By the time the credit card bill comes in your cash balance should be credited with your pay, thereby keeping your cash balance healthy and reducing your interest bill on your mortgage. The reason that it’s better is because it’s a tax free benefit (if it’s for your own home), unlike interest from your savings account which is taxed come tax time.

  • We only use a debit card, which I believe has lower fees for the shop or business, and no fee for us (the account also earns interest), but we still get slugged the “credit card fee” in certain cases. We try to avoid this locally by using cash, but it’s not possible when the business is interstate or doesn’t have a shopfront. Most supermarkets will provide cash withdrawal, if we make a purchase, so it’s not too difficult to manage.

  • The one thing that people never take into account when they talk about shopping on credit cards is that most people will spend more on things that don’t need than if you use cash.

    Studies have shown using cash triggers a part of the brain associated with pain and people will generally be more conservative with their spending if they use cash. Spending on credit cards has no affect on the brain so it is more likely that you will over spend.

    On larger purchases having a big wad of cash gives you more negotiating power to if used correctly and you’re not afraid of using some sales skills.

  • The most ideal situation, providing you never spend more than you actually earn and therefore can pay off the credit card before the interest-free period is up, is when you have a mortgage that is being offset by another account. Leave all your money in the offset account, use your credit card for all the purchases (unless there is a huge 4 or 5 percent surcharge for doing so) and leave the offset money where it is until a few days before the credit card payment is due (or if you have c/card and mortgage with the same bank, they can usually set up a sweep to do this automatically for you). This way you are paying less interest on your mortgage and no interest on your purchases but you’re still spending the same amount you would have without the c/card etc

  • How about you use savings or cash. Then there is no problem and you stop getting into debt.

    • If you are smart with your money and pay the credit card off promptly, its no different to using cash or savings. I only use my credit cards, and carry $50 cash as an emergency. I’ve not payed interest on my account ever, my high interest savings is making money off the credit card company’s money, and I get fringe benefits like deals on flights, accommodation, concierge services, replacement warranties, travel insurance etc. No annual fee 55 days interest free, saved me a packet over the years!

    • Absolutely right! Whenever these type of articles come up the “I always pay them off in time” bandwagon swings into full force. As a generation and culture we have been brain washed by credit companies that this is how “smart” consumers operate. Study after study shows that if you spend on card you spend more. Plain and simple. Here are a few of the studies worth researching if anyone doubts my assertion.

      1) Hirschman, Elizabeth. “Differences in Consumer Purchase Behavior by Credit Card Payment Systems.” Journal of Consumer Research, 1979.
      2) Feinberg, Richard A. “Credit Cards as a Spending Facilitiating Stimuli: A Conditioning Interpretation.” Journal of Consumer Research, 1986.
      3) Promothesh Chatterjee, Randall L. Rose. “Do Payment Mechanisms Change the Way Consumers Perceive Products?” Journal of Consumer Research, April 2012.

      A lot of sales people are taught that if you identify that someone is paying with a card you can ask for a higher price and don’t need to be as aggressive with your price cuts during the negotiation phase than if the consumer was spending their hard earned.

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