We’ve been comparing debit cards with credit cards in this series.  This time we’ll talk about credit cards and their potential benefits and drawbacks.  Then we’ll discuss some federal protections available to credit card users:

Potential Benefits of Credit Cards

A Fast, Unsecured Loan: Credit cards enable you to buy goods or services now and – unlike debit cards – pay later. Your payment won’t be due for at least 21 days after your monthly credit card bill is mailed or delivered.

Options to Avoid Interest: If your card has an interest-free grace period and you pay the balance off each month, you won’t be assessed finance charges.

Building a Good Credit Record: If you’re careful about how you manage your credit card, especially by paying your bill on time, your credit score will go up and you may qualify for lower interest rates on loans and credit cards.

Potential Concerns of Credit Cards

Interest Charges: If you don’t pay your card balance in full each month or your card doesn’t have an interest-free grace period, you will pay interest. This can be costly, especially if you only pay at or near the minimum amount due each month. You also may be subject to interest rate increases. However, as of August 20, 2009, you must be told at least 45 days before any rate increases or other significant change in account terms takes effect. If you don’t agree with the new terms, you generally can cancel the card, pay off the balance over time at the original rate and terms, and avoid the new terms.

Overspending: “High credit limits and the ability to earn rewards for using a credit card can make it easy for some people to spend beyond their means,” cautioned Janet Kincaid, a Regional Ombudsman at the FDIC. “Don’t get caught in the cycle of buying things you don’t need or can’t afford just to get points for future travel or other rewards. Without even realizing it, you may end up paying more in interest than you’re earning in rewards.”

Fees: Credit card fees are likely to include those for paying late and going over the credit limit. Some cards also have annual fees.

Consumer Protections for Credit Card Users

Federal law limits your losses to a maximum of $50 if your credit card is lost or stolen, although industry practices may further limit your losses. You are also protected against billing errors. In addition, federal law may allow you, under certain circumstances, to withhold payment on defective goods until the problem has been corrected. These protections are a big reason why most experts recommend credit cards – not cash, checks or debit cards – when paying for big ticket items or services that you want to know will work as promised.

Also, the Credit Card Accountability Responsibility and Disclosure Act of 2009 is intended to help shield consumers from abusive fees, penalties and interest rate increases. Some provisions of this law took effect August 20, 2009, but most start next year. For example, starting February 22, 2010, a card issuer can’t allow you to go over your credit limit and then charge a penalty fee for having done so unless you explicitly agree to this practice in writing. In contrast, most debit card issuers will assess a fee for making a purchase or other transaction that exceeds your account balance.

Final Words of Wisdom

Credit cards may be especially useful if you want to pay for things when your bank account balance is low or to take advantage of a no-interest grace period.

There’s also a different type of credit card, a “charge card,” that must be paid in full each month. “A charge card may be a good option for people who are not planning to carry a balance and want to avoid interest charges,” said Creamean. “However, if you use your charge card and then have a financial setback, you still need to pay in full each month, whereas with a credit card, you could carry a balance forward until your situation is better.”