Spending Showdown: Debit Cards vs. Credit Cards
Take a look at your wallet. Most Americans carry several different payment cards in their wallets; some debit, some credit. Maybe you have a system in place for which card to use when, or maybe you use one type all the time. But do you really know the difference and when it is more beneficial to use one over the other? Below, we’ll put debit cards and credit cards in a one-on-one showdown to see where and when using them may be best for your finances.
First up: Debit Cards. Debit cards are cards that are directly linked to a savings account, checking account or group of accounts at the same financial institution. Typically, you can withdraw or spend money directly from checking, savings, and even investment accounts. Generally, there are no individual transaction fees on debit card purchases from your financial institution, but some merchants charge a nominal fee for using debit cards at points of purchase. You can also use your debit card at any ATM to withdraw cash or to get cashback at most registers—if funds are available. Some debit cards have automatic roundup savings (where the change from your purchase is rounded up to the next dollar and is automatically deposited into your savings account).
Tip: Even when using your debit card, choose to pay by ‘credit’ when asked at the register. By using credit, it saves your credit union fees, which in turn allows them to pass savings on to you. The money still comes out of your bank account directly with no interest or extra charges to you.
Credit cards are popular, but a little more complicated. When you use a credit card, the money is not linked to your savings or checking account, so your account balance doesn’t matter. Instead, you can use a credit card on purchases until you reach your credit limit. When you first apply for a credit card, the issuing institution will let you know what your credit limit is, along with other terms. However, just because you may have a credit limit of $10,000.00, does not mean you necessarily want to spend that much. Remember, you’ll have to pay it back. Plus, unlike debit cards, any purchase will also come with an added interest charge at a rate determined by your institution. That means a $100 purchase could end up costing you $120 or more, depending on how long you take to pay it off.
That doesn’t mean credit cards are all bad – they come with many benefits as well. For example, many credit cards have rewards programs that can save you money on purchases, gas, and travel. Using a credit card and paying off the balance each month can also help increase your credit score.
Tip: Some financial institutions offer pre-paid credit cards, which require you to pay a deposit or a certain amount up front for you to use and borrow against. This is an easy way to start building credit, without the danger of running up a large borrowed balance.
Now that we know a little about the contenders, let’s see how they stack up against each other. It may to help you to choose where, when and how to use your card(s) effectively:
• Must have funds available
• Good for everyday purchases
• Spend up to your credit limit
• Good for larger purchases you can pay off over time
• Purchases may cost you more in the long run if you do not pay off your balance each month
Security and Liability
• Most financial institutions offer zero availability for fraudulent purchases if your debit card is lost or stolen, as long as you report the loss in a timely manner
• Use of a PIN (Personal Identification Number) helps keep the chances of fraudulent activity down
• Credit cards generally have better protection, including built-in credit and identity theft monitoring
• Generally no fees, except at ATMs and some merchant fees for choosing debit at the register
• Some cards have annual fees on top of any interest charges
•Because the money comes directly out of your account, you do not incur interest charges on purchases
• Interest accrues on any balances that have not been paid in full, based on your interest rate
• Cash advances are also generally higher and will cost you a lot more than pulling money out of your account from a debit card
• Generally no rewards
• Cash back only
• Wider range of more valuable rewards such as airline miles, gas credits, and gift cards
• Purchases do no help you build credit
• Timely payments as well as keeping your balance less than 15% of your credit limit can help build credit over time