Chances are you have a debit or a credit card in your wallet right now, maybe even both. Carrying cards instead of cash has several benefits: Cards tend to be safer, are very convenient, have additional cash-back rewards and they make transactions easier to track electronically. But is a debit card better than a credit card?
There are some important differences between credit and debit cards that could have a big impact on your finances depending on your spending habits. Find out how to decipher the right time to use for each card type.
First, let’s get back to the basics and outline the differences between a debit card and a credit card.
- Most are attached to a bank account, usually a checking account.
- Other types include Electronic Benefits Transfer (EBT) cards, an alternative payment method that employers use instead of a paycheck or direct deposit.
- They require a PIN number or signature for every transaction.
- A line of credit issued by a lender.
- Often rewards users with points, cash back, etc.
- Has a maximum limit based on your credit score.
- May incur monthly fees if balance is not paid off.
Debit Card vs. Credit Cards
If your wallet is stolen, there tend to be differing policies on the charges made on your card. If your debit card is compromised, you may be financially responsible for any losses. However, credit card companies are able to protect you from most financial loss through the Fair Credit Billing Act. Through this legislation, you’re able to dispute unauthorized purchases and even your own purchases where the goods promised were damaged or lost. If you made the same purchases with a debit card, they would only be reversed if the merchant was willing to do so.
Some people choose to purchase things on credit cards so they can accumulate points, then repay the full balance. If you are able to pay off the card, this method has the potential to help you earn reward points. However, if you find yourself frequently rolling over balances, the APR you end up paying cancels out the perks of the point system. Using a debit card can help you from spending money you don’t have. Studies have shown that people tend to be more cautious with cash than with credit, so if you need to rein in how much you spend when you shop, stick to your debit card.
When you go to a hotel, rent a car or engage in other charges that require a card to hold, the business will run your card for a certain amount that is then released after the rental period is over. However, depending on the business, this refund can take several business days. If you use a debit card, you are out of that cash until it’s returned. In the case of a credit card, you’re able to borrow and return without any major strain on your liquid funds.
Building Your Credit
Regular use — with consistent and timely payoff — of your credit cards can help build your credit. The longer you have a line of credit open also positively impacts your score. However, the reverse is true: If you pay late or if you carry balances over 30% of your credit limit your credit can suffer. As long as you are in good standings, credit cards can help. Debit cards do not have any impact on your credit score.
If you stay in good standing, most credit cards fees are avoidable. If you don’t carry a balance, APR is not an issue. If you make payments on time, you can avoid late fees. Some cards do have an annual fee, but there are many that don’t and still feature competitive APRs and reward systems. Depending on your bank, debit cards can have a wide range of fees. Foreign ATM transaction fees, maintenance fees, overdraft fees, minimum balance requirements and more — check with your bank to find out what you can expect for your account type. If you’ve been with your lender or bank for a while and are in good standing, call to see if you are exempt from certain fees.
As mentioned above, lenders often reward the use of their card with travel credits, cash back and more. Perks like these are not typically available to debit card users. If you’re able to pay off your credit card balance regularly, you could reap the rewards.
The next time you need a rental car, consider using your credit card — many lenders will give you a waiver for collisions. Check with your lender before you book to see if you’re covered. It is common for a car rental company to require a credit card rather than a debit card for liability reasons.
If you are a big spender, a debit card is probably the best choice for you. It may help curb your spending and keep your budget balanced. However, if you’re confident you won’t abuse your credit card, there are many benefits to using one. Choose the method that best aligns with your spen