Debit Cards

How do debit and credit cards compare? Naturally, there will be occasions when it is better to use one rather than the other. Hence, here’s our detailed guide to which plastic is more fantastic!

Almost all plastic cards belong to one of six major payment-card systems, which are operated by American Express, Diners Club, JCB International, Maestro, MasterCard and Visa. These operators process transactions and transmit money through their card networks.

However, credit cards have been around a lot longer than debit cards have. The first major credit card, Barclaycard, was introduced forty years ago in June 1966. However, the UK’s first debit card, the Visa Delta card, using the brand name Connect, was launched by Barclays in 1987.

1. Ease of use

Debit and credit cards have fairly similar formats and appearances; for example, they all measure about 86mm by 54mm, and have a 16-digit number across the middle.

They work in pretty much identical ways, too. When you present your plastic card for payment, the retailer sends data to the bank which processes card transactions on its behalf, known as the merchant acquirer.

This data then passes to the card scheme (such as MasterCard or Visa), which then electronically contacts your card issuer to gain approval for the transaction. The relevant information will then be squirted back down the line, and your card issuer will debit your bank account or credit-card account and pass it down the chain. All this communication takes just a few seconds. Job done!

Most organisations which take debit cards also take credit cards, so we’ll call this round a draw.

½ point to both cards

2. Additional charges

Aha, this is where things get interesting! On some occasions, paying with a credit card can incur additional handling fees and interest, which gives debit cards the edge in these circumstances.

For example, some travel agents and other outlets which process large transactions will add a surcharge of, say, 2% if you pay by credit card. On a £2,500 family holiday, this adds £50 to the bill, so paying by debit card would be the better option. Furthermore, when you buy foreign currency on your credit card, some issuers apply the same charges and sky-high interest rates that they levy on cash withdrawals (see below). The same goes for online gambling and other cash-like transactions, so beware!

Another point to debit cards

3. Withdrawing cash

In 2005 alone, we used our plastic cards to make 2.7 billion cash withdrawals from automated teller machines (also known as ATMs, cash machines, holes in the wall, etc.), plus a further 108 million over-the-counter cash withdrawals.

Debit cards are ideal for drawing cash. Off the top of my head, I don’t know of any which charge fees for cash withdrawals from non-commercial machines or over-the-counter transactions in branches.

Credit cards, on the other hand, should NEVER be used for cash withdrawals! Why not? Simply because credit-card issuers charge withdrawal fees, typically 2.5% of the amount withdrawn, minimum £2.50 — and these fees are creeping up. In addition, most credit cards don’t provide any interest-free period for cash transactions, so you start paying interest at ultra-high cash rates (usually 20% APR or more) from day one. Credit cards and cash machines don’t mix, so don’t let them meet!

Another point to debit cards

4. Fraud and legal protection

If money is fraudulently taken from your current account or credit card account, and you haven’t been negligent with your card and PIN, then you are only liable for the first £50 of any theft and often the bank won’t even apply this excess.

However, if you’ve carelessly revealed your PIN (perhaps by writing it down on a document kept with your card), then you will foot the entire bill — and learn a valuable lesson about information security! On this count, credit cards and debit cards offer a similar level of consumer protection.

However, credit cards have the edge when it comes to paying for goods costing £100 or more, thanks to the valuable legal rights afforded by Section 75 of the Consumer Credit Act. If you order goods or services costing between £100 and £30,000, in the UK or overseas, and pay even a £1 deposit with your credit card, your card issuer stands in the shoes of the supplier if the goods fail to arrive, are damaged or faulty, or are otherwise unfit for their intended purpose. Hence, if you don’t want to lose your money if a supplier goes bust, stick to paying with your credit card for goods costing £100+!

Another point to credit cards

5. Interest-free periods and interest rates

If you always pay off your credit card in full every month, you can enjoy an interest-free period which typically lasts between 45 and 59 days. However, if you don’t, you can expect to pay annual rates of interest which average around 16% a year, but can exceed 30% APR! (To avoid this problem, you can use a 0% on purchases credit card, which offers an introductory interest-period lasting up to a year.)

On the other hand, when you make a purchase using a debit card, the money is debited from your bank account within a day or two, so there’s no effective interest-free period. What’s more, you won’t pay any interest while your current account is in credit — and you could earn more than 5% a year on your credit balances in a Best Buy current account. However, if your spending takes you overdrawn or you exceed any approved overdraft limit, you’ll face a frightening assortment of charges and mega-high interest rates, so stay out of the red if you don’t have prior permission!

Another point to debit cards

6. Cashback, loyalty and rewards schemes

There are dozens of cashback and rewards credit cards to choose from, the best of which pay up to 5% cashback for an introductory period. Personally, I do all of my shopping on my cashback card, as I pay off my entire bill each month by direct debit. You can easily earn hundreds of pounds a year doing this. Result!

Another point to credit cards

7.Credit limits

Finally, we come to the tricky subject of credit limits. With a current account, you can freely spend as much as you have in your account, plus the value of any approved overdraft. Thus, with a £2,000 credit balance and a £1,000 authorised overdraft, you could spend up to £3,000 before penalty charges kick in.

On the other hand, credit cards encourage millions of people to spend money that they don’t have. Indeed, many people see a £10,000 credit limit as a target, and assume that they have been given an extra £10,000 to go mad with in the shops. Bad move! With banks sending out credit-card offers in their millions every week, easy credit could easily become tough debt when times get hard. Hence, I’m awarding the final round to debit cards, not debt cards!

Final point to debit cards

The decision

After nine rounds, here is the judge’s decision: credit (debt) cards have a respectable 2 ½ points, but debit cards win the contest with 4 ½ points. Throw in the fact that most debit cards also double as cheque-guarantee cards, and debit cards win by an even bigger margin.

Credit Card Debt Help

Contact your lender(s) as soon as possible, preferably before you default on your minimum repayment. Explain your situation and stress your willingness to pay whatever you can. You should be able to negotiate an achievable repayment plan or payment holiday. However, do not agree to any specific deal without consulting independent help.

Where can I go for free, independent advice?

The CCCS advice line (0800 1381111) refers complex cases for face-to-face sessions. Credit Action, a sister charity, offers guides and resources at CreditAction.org.uk. An alternative telephone service is the National Debt Helpline on 0808 8084000. Alternatively, contact your local Citizens Advice Bureau (see Citizensadvice.org.uk)

What if I have several debts?

Tackle those that threaten your home, energy supplies or liberty first, but keep all creditors up-to-date. These priority debts might be mortgage payments, utility bills and council tax arrears.

What else can I do?

You may be able to supplement your pay or pension with part-time work. Also, consider the Government’s Rent-a-Room scheme, which allows you to receive up to £4,250 a year from a lodger tax-free. Trading on eBay, or similar websites, is a another popular way to boost funds.

Billions of pounds in tax credits go unclaimed. Research from Citizens Advice found that many of those entitled to the working tax credit and the child tax credit do not claim.

If you do manage to raise extra income, it is a good idea to pay more than the minimum repayment on your credit cards. Research by uSwitch.com, the comparison website, indicates that paying 3 per cent, rather than 2 per cent, can more than halve both the interest paid, and the repayment time.

What else can I do?

You may be able to supplement your pay or pension with part-time work. Also, consider the Government’s Rent-a-Room scheme, which allows you to receive up to £4,250 a year from a lodger tax-free. Trading on eBay, or similar websites, is a another popular way to boost funds.

Billions of pounds in tax credits go unclaimed. Research from Citizens Advice found that many of those entitled to the working tax credit and the child tax credit do not claim.

If you do manage to raise extra income, it is a good idea to pay more than the minimum repayment on your credit cards. Research by uSwitch.com, the comparison website, indicates that paying 3 per cent, rather than 2 per cent, can more than halve both the interest paid, and the repayment time.

Should I transfer to a cheaper card deal?

It may be a good idea to transfer the outstanding balances on all your credit cards to one card with a 0 per cent rate on balance transfers, and a good subsequent interest rate. You can shop around for the best deals at comparison websites, such as uSwitch.com and moneysupermarket.com. Take independent advice on this before going ahead.

How about borrowing to repay debt?

Unless you are told otherwise by an independent adviser, this is likely to increase your burden in the long run.

What about consolidation loans?

Consolidation loans are secured on your home, unlike many of the debts that they wrap up. Chris Tapp, of Credit Action, says: “In most cases, these loans are more expensive than negotiating with your creditors.”

Can debt-management companies help?

These charge for advice that is available free from charities. Mr Tapp says that most take a fee upfront, plus 10 per cent on payment plans — so £20 of a £200 monthly repayment goes to the middleman.

What is the last resort?

There are times when debts run out of control and bankruptcy or an individual voluntary arrangement (IVA) becomes the neatest solution. “That’s something a debt charity would be able to advise on,” Mr Tapp says. “Just don’t be sold an ‘easy way out’ by a private company.”

In the meantime, you should reply to all creditors’ letters, obey any court summonses and abide by county court judgments (CCJs). Lenders and courts will be more sympathetic, and lenient, where your good intentions are clear.

The new rights were secured in an agreement between the government and the credit and store card companies.

The industry will introduce the key changes this year and they will be given statutory force as soon as possible, the government said.

A general election is widely expected on May 6, and recent opinion polls show the Labour Party is narrowing the lead of the Conservatives. “These new rights will put an end to the irresponsible lending practices that people have been most concerned about, and help cut the cost of borrowing,” Prime Minister Gordon Brown said in a statement.

The government estimates the new rights will save consumers almost 300 million pounds a year.

Under the agreement, the most expensive debt on consumers’ cards will be paid off first, reversing the current practice. Consumers will have the right to choose not to receive credit limit increases and the right to reduce their limit at any time.

They will be given more time to reject increases in their interest rate or their credit limit.

Consumers will have an annual statement that allows easy cost comparison with other providers.

People at risk of financial difficulties will be protected by a ban on increases in their credit limit and a ban on rises in their interest rate.

The Conservatives said the Labour government had consistently failed to take tough action to stand up for consumers and had failed the test again.

“Only the Conservative Party is committed to an interest rate cap for store credit cards, banning energy companies from charging unfair profits on pre-payment energy meters and enabling people without bank accounts to pay their bills via direct debit at the Post Office,” Conservative financial services spokesman Mark Hoban said in a statement.

Paying over the odds by paying off cheap debts first?

Can my card company still raise the interest rate on existing debts?

Yes – the Government has shied away from banning this practice, which many consumers see as an unfair rewriting of an existing agreement. But it is giving cardholders more chance to avoid paying higher rates of interest.

Cardholders currently have 30 days to tell their card company that they want to reject an interest-rate increase, close the account and pay off the outstanding balance at the existing rate. This notice period will be doubled to 60 days.

In addition, consumers will be notified at least twice during the 60 days that they have the right to reject the rate rise. Card companies will also tell them how much their borrowing will cost at the higher rate, so they will be able to see the real impact of an interest-rate increase when making their decision.

The Government also said it would ban rate rises on existing debt for consumers “at risk of financial difficulties”. Card companies will work with debt advice agencies to agree how they will identify consumers at risk, according to a joint statement from the Government and the companies.

Will I still pay over the odds by paying off cheap debts first?
No, under the changes you will be entitled to pay off your most expensive credit card debts first.

Currently, customers often find their payments applied to balances that are not incurring interest (such as 0pc balance transfers) while parts of their balance on which interest is charged are not being reduced. If the credit card issuer applied the payment to the interest-bearing balance first, the customer would pay less interest overall.

The joint statement said: “Consumers’ monthly payments will always pay off their most expensive card debt first. This fully reverses current widespread practice.”

Kevin Brennan, the consumer affairs minister, said that although the new rules would not be enshrined in law, the effect would be the same. He said they would be part of a binding code of conduct between card companies and the Government. “The Financial Ombudsman Service can take codes of practice into account when resolving disputes between customers and financial firms,” he added.

The change will benefit around a quarter of all credit card accounts, according to the UK Cards Association, which represents issuers. More than 79pc of credit cards allocate repayments to cheapest debt first, according to Defaqto, the analyst.

Can my credit limit still be increased without my requesting it?

Card companies will still be able to offer an increased credit limit, but they will have to give 30 days’ notice and a simple means of “opting out” of future increases. They will be banned from increasing credit limits for consumers at risk of financial difficulties and there will be a new legal requirement to undertake a creditworthiness assessment before offering a significantly higher limit.

All cardholders will also have the right to reduce their limit at any time – they will be able to request a lower limit online or through an automated telephone system.

Will my minimum payment be increased?

No, not automatically. Instead, card companies will contact customers who repeatedly make only the minimum repayment and make clear that this is the most expensive way of paying off a debt.

But for new credit card customers the minimum repayment will always cover at least interest, fees and charges plus 1pc of the outstanding balance. This means that some minimum payments on new accounts will be higher in future.

When will these changes happen?

The “key consumer benefits” will come into effect by the end of the year, the joint statement said. This means that consumers will not have to wait for legislation to be passed to benefit from these measures.