Many executives have coached business owners on spending. FTC Publications CEO is no exception. Warith Niallah advises business owners to use their credit cards instead of their debit cards. In the opening statement, Mr. Niallah stated that the credit card is better than debit. “You should buy with the credit card and pay in full when it’s due”. He also stated that when you use your debit card, it withdraws immediately from the checking account. This reduces the time cash is in the account and lowers the balance faster. Several points were raised and are summarized below.
Defining a Debit Card
A debit card is a form of payment that looks and functions like a credit card with a major credit card logo such as Visa®, MasterCard®, and others. Funds come directly from the checking account in most cases. While it functions like a credit card, there are some important differences. Federal regulations do not protect debit card purchases, like credit cards. The bank protections are defined uniquely at each bank and are at the bank’s will. If the card or number is compromised and used it has an immediate impact on the account balance and can lead to overdrafts. Business operations can also be impacted, including the business’ payroll. The ability to pay other bills can be impacted, and result in more interruptions. While banks may refund overdrafts or restore the balance in some cases, this is at the bank’s discretion. If too much time elapses before the refund is issued, unrelated bills can be impacted causing late fees and other interruptions.
A credit card allows the buyer to make a purchase and pay later. There is no immediate impact on the bank account balance. The cardholder pays the bill when it is due later. When the cardholder pays the balance in full, it is typically interest free. This allows the credit card to function much like the debit card but with federally regulated purchase protections. This protection provides consistency. If the purchase turns out to be faulty or the service is below buyer expectation, they have recourse via the dispute process. Credit cards also provide more buying power and flexibility in that the credit limit can far exceed the current available cash balance. Buyers can also request an interim or permanent credit line increase as well if needed proving even more buying power and flexibility. If the card or number are compromised, there is no direct impact on the business. Operations are not at risk because the disputed amount isn’t due until the bank’s investigation concludes.
Traveling with a Debit Card
Using a debit card when traveling involves inconvenience at best. When checking in to a hotel, the card will have an authorization (he discussed and defined later) placed on it. With some banks, this will affect the available balance, even though the actual charge may be less. The same is true for car rentals, where the authorization may exceed the final bill, further reducing the available balance. Some car rental companies will perform a full credit check at the time of rental. This may impact the renter’s credit score and could also cause the rental to be denied based on the report. There are other car rental companies that will not rent to users that only have debit cards at all.
Traveling with a Credit Card
The credit card offers more flexibility when traveling. When a hotel or car rental company authorize the card, the impact will not affect the account balance. The car rental company will not run a credit check. Services such as self-service check-in or premium services will be available.
Authorizations and Captures (Charges)
When using a debit or credit card, two terms are important Mr. Niallah shared with the business owners. When the retailer checks to see if an amount is available on a card, this is an authorization. When the retailer charges the final amount, this is called a capture. The capture is what you will see on the statement. A hotel may authorize $500 for a stay which may eventually cost $260. A car rental company may authorize $300 for a rental that will cost $120 in the end. This is a common practice.
The discussion ended with a few questions and answers. Mr. Niallah suggested that, if possible, have your bank lower you debit card spending limit to the minimum. He concluded, “This won’t affect the ability to withdraw cash at an ATM”.