Should You Use a Debit Card or Credit Card?
Debit Cards and Credit Cards are two easy ways to pay for everyday expenses. Nearly all businesses accept both in similar fashion but is there one that shines above the other? This article will explore the reasons why credit cards often provide more advantages than debit cards, making them a preferable choice for many consumers.
Fraud Protection
Debit Cards
A fraudster who gets access to your debit card has access to spend all of the money in your checking account. While banks will typically reverse these charges, it can take some time to do so leaving you low or out of cash until the issue is resolved.
Credit Cards
Credit card holders are not responsible for fraudulent charges. So long as they are reported promptly, you will not have to pay for them and wait for reimbursement later.
Winner = Credit Card
Credit Score Building
Debit Cards
Debit cards do not contribute towards improving your credit score.
Credit Cards
Regular and responsible usage of credit cards builds your credit rating over time. A good credit score makes obtaining auto loans, home mortgages, and even housing a much easier process and can save quite a bit in interest over time as higher credit scores pay lower interest rates.
Winner = Credit Card
Rewards & Benefits
Debit Cards
There are some debit cards with rewards such as cash back but most do not have any sort of benefit for using them.
Credit Cards
Credit cards have cash back, travel, or hotel rewards and can also provide valuable benefits like purchase protection, rental insurance, and luggage replacement.
Winner = Credit Card
Float
Debit Cards
Debit cards deduct directly from your bank account balance. If you do not have enough in your balance, the transaction will reject. This feature can be advantageous to prevent overspending but can also be inflexible if you either have the cash in a different account or truly need (like buying medicine not pizza) this when the funds are coming later.
Credit Cards
Credit cards have a credit limit which allows you to float funds. Floating funds is basically a fancy term for paying for it later. While this has its disadvantages, it can allow you to cover expenses with more flexibility.
You should almost never put something on a credit card that you do not have the cash to pay for.
Winner = Tie
Fees & Interest
Debit Cards
Debit cards are generally no or low fee; and since the debit card just uses cash right from your account, there is not interest charged.
Credit Cards
Credit cards can have no annual fee or can have a substantial annual fee ranging in the hundreds of dollars. But the larger cost is in the interest charges from the high rates of 15% to upwards of 28%!
Winner = Debit Cards
Cash Access
Debit Cards
Debit cards provide access to cash from your account from ATM’s and cash back when checking out at stores. If using your own banks ATM, there is generally no charge.
Credit Cards
Obtaining cash from a credit card comes with higher cash advance fees making withdrawing cash an expensive venture.
Winner = Debit Cards
Summary
Overall, while the debit card had some categories being the winner (fees/interest, cash access), the other benefits related to credit cards make a strong case for using credit cards over debit cards in most situations.
With responsible usage and advance planning, the downsides to credit cards can also be mitigated.
Thoughts on Reasons Not Use Credit Cards
High Interest: Yes, credit cards have high interest rates which is why you should never carry over a balance. If you pay off the balance every month with cash you had set aside, there will not be interest charged.
Overspending: Yes, there are some studies that using credit cards increases spending. However, if you are maintaining and tracking to a budget, overspending should not be an issue you are dealing with on a regular basis. 8 Benefits of Budgeting – Gilbert Wealth
Fees and Penalties: There are money credit cards without fees and those that do often offer other benefits that offset the cost such as statement credits.
See The Cardinal Rules of Travel Hacking and Other Guidelines – Gilbert Wealth for other rules of using credit cards.