Paying with Plastic: Debit vs. Credit Cards

Rick Emerson, author of Zombie Economics, stopped by with important information about credit and debit cards.

When it comes to paying with plastic, theres an avalanche of options. How do you know which card is right for you? (And if youre getting a fair deal?) How many cards is too many? And how do you keep track of all those different airline miles, anyway?

1) Whats the right number of credit cards to have? (Or is there a right number?)
For most people, the answer tends to be: four to six cards. What
s more important is the balance on the cards. Credit companies like to see a balance (or utilization) of no more than 10% of the cards limit (for example, $2,000 on a $20,000 card.) Having ten cards with a 10% balance on each is better for your credit score than a single card which is maxed out (or getting there.)

If you want to have your bases covered, a single card from each of the big-name companies (MasterCard, Visa, AmEx, etc.) should be enough to give you options in most situations (and locations), while still being manageable.

2) When it comes to credit versus debit, how do you know which card is right for the situation?

Debit:
   First and foremost, if youre working on a smaller budget, debit should always be your first choice. It will help you stay within your spending limits and makes it easier to know how much money youve got at any given moment.
   Getting money abroad. Generally speaking, exchanges will give a lower rate for people using their debit card to get currency (instead of credit). Its sometimes just a little, but a little can make all the difference, depending on where you are.
   If youre paying an individual or a small business. Credit cards often carry an extra charge for the business or person whos taking them; paying with a debit card (or cash) at the falafel stand means that the whole amount actually goes to them.

Credit:

   Online payments. While both debit and credit cards usually have a liability limit for fraud, credit-card companies themselves actively monitor for suspicious online spending, meaning it typically gets spotted faster. With a debit card, its often up to you and you alone to notice anything amiss.
   Vacations. For the same reason as online spending, credit-cards are the safer choice when paying on vacation. Youre unlikely to review your transaction history between Mai Tais, so its good to have the credit-card company doing it for you.

3) For those who are rebuilding their credit (or just starting to use credit) are secured cards a good idea? 

Secured cards can definitely help restore battered creditor establish credit if youre just starting out. For this reason, parents will often create a secured credit card for college-bound children. Typically, the user puts down a flat payment (say, $500), which becomes the cards credit limit. From then on, the drill is the same as most cards: keep your balance low, make your payments on time, and your credit score will slowly improve.

Some things to remember:
   Secured cards are not debit cards. That initial $500 payment is collaterallike a security deposit when you rent. It stays in a separate account, and if the cardholder fails to make their payments, the company takes that $500 (along with the card and many, many points off your credit score.) Most secured cards will return that initial deposit after a year or so, provided youve made all your payments on time.
   When looking for a secured credit card, make sure its from a reputable company credit unions are a good place to start. And make sure the card reports to the big three credit agencies (Equifax, Experian and TransUnion). If they dont, it wont help your credit score one bit.

4) There are hundreds and hundreds of rewards plans, especially for airlines. How can you keep track of what youve earned?

A good place to start is with AwardWallet.com. They track almost 600 different rewards programs, and while there are some gaps (they dont cover some of the airline plans, for instance), its a great way to get a handle on a lot of what youve earned.

Theres an incredibly useful smartphone app called Wallaby. When youre out shopping (or at a restaurant), Wallaby uses your location to tell you which of your cards offers the most points at that particular business. It says, Hey, youre at Nike Town, use your AmEx, or Youre at Whole Foods, use your Visa. Wallaby is available for both iPhone and Android.

5) When it comes to frequent-flyer miles, whats the best way to make the most of them?
As a rule of thumb, each frequent-flyer mile is worth around two centsso 25,000 miles = about $500. But their trade-in value goes up if youre using them to pay for an expensive flight. So while those 25,000 miles might be worth $500 for a short domestic flightthey might be worth $2000 for an expensive or overseas flight. If you can afford to pay for low-cost flights yourself, do itand save the miles for something more expensive. Theyll go much further.

Finally: many of the major airlines (including Delta, United, and Southwest) will be drastically reducing the value of their rewards miles later this year. If youve got miles built up, check to see if youll be affected. If so, you might want to use them before they drop in value. You can find out more about this at Credit.com.

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