The phrase “Debit or credit?” has undoubtedly been used a gazillion times by this point. However, have you ever considered which is best?
Which choice makes the most sense will depend on how debit and credit cards differ from one another. Continue reading to learn when using a credit card is recommended versus when using a debit card.
Credit Card vs. Debit Card: Key Differences
When you pay for groceries at the cashier with a debit or credit card, the processes are essentially the same. They do have a few important distinctions, though.
According to Brian Walsh, a certified financial planner and senior manager of financial planning at SoFi, the primary distinction between debit and credit cards is that the former require you to use your own money while the latter let you borrow it. Let’s examine that in more detail now.
What Is a Debit Card?
When you make purchases with a debit card that is linked to your checking account and PIN, funds are taken directly out of your account balance. Your debit card can also be used to withdraw cash from an ATM or to receive cash back at specific retailers.
You can incur overdraft fees if you make a purchase for a sum more than your available balance. Until you make a deposit to put your account in the black, it will display a negative balance.
To prevent overdrafts, many banks let you link your checking account to another one, such a savings account. However, this protection can come with a cost. Any transaction that would be refused if you choose not to use overdraft protection would be one that would exceed your available amount.
A debit card also has no impact on your credit, contrary to a credit card, according to Walsh.
What Is a Credit Card?
A credit card operates in a different way from a debit card, despite the fact that both are pieces of plastic that can be swiped to make purchases. You can draw money from a revolving line of credit connected to your credit cards whenever you need it.
You are permitted to carry a balance from month to month, but interest will be applied. Additionally, there will be a minimum payment you must make in order to avoid incurring further charges.
Despite these benefits, there could still be drawbacks to borrowing credit. “Credit cards typically come with high interest rates and annual fees, but they also typically offer better cash back or rewards (than debit cards),” Walsh explains.
Additionally, since credit card usage is frequently reported to the credit agencies, skipping payments or running up a large load could lower your credit score.
Compared to debit cards, are credit cards safer?
Any money in your checking account is immediately accessible to a thief if your debit card or card information is compromised. Whatever is fraudulently spent is instantly deducted from your balance, and you are left without the money until the matter is resolved.
The speed with which you are able to identify and report the unauthorised charges will determine whether the problem is addressed in your favour. According to the federal Electronic Fund Transfer Act, consumers are responsible for
- If you report the theft or loss prior to any unauthorised charges being made, the fee is $0.
- If you tell your bank about the lost or stolen card within two business days, you could get up to $50.
- If you report the loss or theft within 60 days after receiving your bank statement with the unauthorised charges, you could be eligible for up to $500.
- If you do not tell the bank after receiving the statement, you are subject to limitless liability.
These regulations apply to the use of your debit card without authorization as well as electronic fund transfers like wire transfers, automatic payments, and ATM transactions.
When analysing your account statements, for example, you can discover that unauthorised usage of your debit card occurred much later. According to Nolo, a publisher of legal advice, the bank must extend your notice deadline for a “reasonable period” if you can persuade it that mitigating circumstances were present.
However, the most you might be charged for fraudulent use of a credit card is $50. The majority of the time, card issuers won’t hold you liable for any unauthorised charges.
It should be noted that you are not liable for unauthorised credit card charges if your account number is used but your card is not stolen. If you report any unauthorised use of your debit card number within 60 days of receiving the statement with the charges, you won’t be held responsible. Make sure your monthly statements and your receipts line up every month.
Benefits of Using a Debit Card Instead of a Credit Card
Credit cards are not always the best choice, despite the fact that they are typically safer from a fraud standpoint. When to use a debit card in place of a credit card is as follows:
Benefits of Debit Cards
Help control spending- You can only use your debit card to make purchases from your bank account. According to financial expert Andrea Woroch, using a debit card is a smart option if you’re seeking to develop healthier purchasing and spending habits or prevent taking on debt.
Avoid paying interest- Remember that you will incur interest charges if you carry a balance on your credit card from month to month. Commit to using your debit card while you’re trying to pay off debt, advises Woroch.
Get money- The best option when you need cash is a debit card. Use your debit card to help you avoid fees and interest charges whether you go to an ATM or choose cash back with a purchase at the grocery store or drugstore. Although you may typically acquire a cash advance using a credit card, Woroch warns that doing so will cost you more because of one-time fees and higher APRs for cash advances. Instead, using a debit card is the wiser choice in this situation.
Benefits of Credit Cards
However, using a credit card may be more beneficial if you wish to:
Keep your money secure- Although credit cards have numerous levels of security, according to Woroch, arguably the best one is keeping your money safe in the bank. “It’s terrifying” she adds if someone steals your credit card and uses it to make purchases because they don’t actually take money out of your bank account like they would with a debit card. In the end, in any case, you wouldn’t be accountable for those transactions. “But using a credit card means you still have access to your bank to withdraw cash or make purchases, and none of your money is held up while the bank reviews this fraudulent activity,” Woroch continues.
generate credit- Each month, the three credit bureaus receive a report from your credit card company detailing your purchases and payments. Your credit score can rise over time if you keep the ratio of credit utilisation low and pay off your bill each month.
Safeguard your purchases- Using a credit card when making a large purchase can be a wise choice. According to Woroch, you frequently get extra protection on purchases and a grace period on your credit card account. A card with purchase protection can either compensate you for the cost of a lost or stolen item you purchased with the card or replace it. If you have trouble obtaining your money back from the shop or after the authorised time period has passed, your card might also offer an extended warranty or the option to request a refund.
Increase your rewards- Although some debit cards give points for purchases, according to Woroch, you may frequently earn far more with a rewards credit card. For instance, clients of the Discover Cashback Checking account receive 1% back on the majority of debit card purchases. Compared to other credit cards, the Discover it Cash Back card provides 1% back everywhere else and 5% back in the quarterly rotating categories you must activate.
Depending on your financial situation and purchasing patterns, you must choose between using a debit card and a credit card.
If you have trouble controlling your spending, Walsh advises sticking with a debit card. “The general theory is that when you pay with cash or a debit card, you subconsciously experience more pain because it is immediate and tangible,” he claims.
If you already have a credit card balance, you should also use a debit card. Carrying a load on a credit card is quite expensive because the interest rates are often very high, according to Walsh. Spending on a credit card “makes it difficult to track your debt paydown progress and increases the likelihood that you will overspend.”
A credit card is, nevertheless, the more financially rewarding choice provided your expenditures and debt are under control. Just make sure to maximise your benefits if you use a credit card for the majority of your purchases by keeping track of your spending, organising how to use rewards, and avoiding penalties.
Responsible credit card use has benefits that are evident, like cash back or rewards, but it can also help you establish credit and improve financial flow, according to Walsh.