The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore Solutions, LLC.
If you didn’t take a summer vacation in 2020, you weren’t alone. And, to the extent you’re going on a summer vacation in 2021, you are most certainly not going to be alone. According to Expedia, Americans plan on taking more time off in 2021 and reclaim their annual getaways.
This increase in travel means more consumers are going to be searching for and contemplating different ways to fund their trips. Given the increased momentum on going “touchless” with payments methods, your choices for funding are likely going to include credit cards, charge cards, rewards points, and debit cards. Each of these methods have their pros and some of these methods have their cons. Accordingly, it’s not a bad idea to refresh your recollection of these pros and cons prior to you packing your suitcases.
If you have a bank of rewards points accumulating across your various credit cards, you should consider using them to fund some, or all, of your travel. You don’t earn interest on your accumulated points so, unless you’re saving them up for a specific trip, there’s no point in not using them. And, your points may start to expire after some period of time so if you don’t eventually use them you may lose them.
You may be able to use your rewards for airline tickets, cashback, hotel rooms, car rentals, or merchandise. It goes without saying that for every one of these common vacation expenditures that you can procure with points, it means you will not have to come out of pocket. That’s real financial savings and, frankly, the intent of rewards programs.
Credit, Charge, and Debit Cards
Unless you have an enormous amount of rewards points you will likely fund some or most of your vacation/s with some form of plastic. Each of the common “card” payment methods come with pros and cons, although some options are clearly better than others especially when it comes to funding travel related costs.
Debit cards, the method of payment directly tied to your deposit account, provide budgetary control of over-spending. The reason…you can’t spend much more than you have in your deposit account. For example, if you have a $500 balance in your checking account then your debit card has a spending limit of about $500. And, debit card usage doesn’t involve you getting into debt because the money you’re spending is already your money, not a financial institution’s money, and thus doesn’t require payback.
However, the downside to debit cards are considerable, especially for vacation travel. While debit cards do have decent fraud protections, any money that is exfiltrated from your account is your money and is temporarily unavailable to clear other, legitimate, purchases. If your debit card is compromised while you’re on vacation it adds another level of inconvenience because you may have to put all spending on hold while you work with your bank to rectify the fraud, which may take several days.
Another more common problem when using debit cards for any type of travel is the hold placed on your funds. When you use your debit card to rent a car, fill up your tank, or stay in a hotel the merchant is going to pre-authorize at least the entire amount of your transaction, if not much more.
The practical impact of these pre-authorizations is they will temporarily make unavailable the funds held to clear your transactions, which will last the entirety of your vacation. This means the locked funds will not be available to use for unrelated vacation spending or to make any other payments you’d normally make with your debit card. Most merchants will clearly communicate their intent to hold funds and warn against using debit cards for this reason.
Credit and Charge Cards
Credit and charge cards, extensions of credit made by a bank, credit union or credit card issuer, are normally tied to a predetermined line of credit or credit “limit.” The practical difference between charge cards and credit cards is charge card balances have to be paid back in full each month where credit card balances do not.
Both of these common methods of payment have iron-clad fraud protections as all credit card networks (American Express, Visa, MasterCard, Discover) have zero-liability fraud policies. This means you will not be liable for any fraudulent use of your card as long as you report it to the issuer in a timely manner, which will likely overnight a new card to you, even if you’re on vacation, meaning any distribution is minimized as much as possible.
With respect to the aforementioned issues regarding pre-authorizations and holds by merchants, they are minimized when you use a credit or charge card. Normally consumers have considerably more funds available to them on credit and charge cards than they have on debit cards, perhaps tens of thousands of dollars more. Imagine the difference between the balance in your checking account and the credit limits across all of your credit cards. This makes holds for pre-authorizations almost meaningless and, thus, increases the usability of credit and charge cards when you’re taking vacations.
Of course, the downside to credit cards is the potential for having to pay interest on any balances incurred during your vacation, and also those incurred otherwise. The average annual percentage rate (APR) for credit cards ranges from about 15% to well into the 20s, making credit card debt expensive to service. There are no interest issues when you use a debit or charge card.
None of my analysis, of course, takes into consideration the value of actually taking a vacation relative to the methods of payment issues. While rewards points offer the least expensive option to fund your vacations, you’re likely going to have to supplement the costs elsewhere. That elsewhere is probably going to include one or more card options, such as debit, credit or charge cards. Each option has pros and cons, although it’s not an even split.
Debit cards offer budget controls but present usability problems. Charge card balances have to be paid in full each month so there are no issues with interest costs. Credit cards have strong fraud protections, considerable usability options, but may result in you paying interest on your purchases, thus making your vacation more expensive than the retail price.