Credit Cards or Debit Cards: Which Should I Use? | Credit card

You’ve probably heard the question a million times: “Debit or credit?” But have you ever wondered which is actually the best?

Knowing the difference between debit and credit cards will help you decide which option is best for you. Read on to find out when it’s best to pay with a credit card and when a debit card is the best option.

Credit card vs debit card: main differences

When you’re at the checkout to pay for your groceries, debit and credit cards work almost the same. However, there are a few key distinctions to understand.

The main difference between the two is that debit cards require you to only spend money you have, while credit cards allow you to spend money you don’t have, according to Brian Walsh, Certified Financial Planner and Senior Director of Financial Planning at SoFi. Here’s an overview of what that means.

What is a debit card?

If you make a purchase for an amount that exceeds your available balance, you may be hit with overdraft fees. Your account will show a negative balance until you make a deposit to bring it back into the black. Many banks allow you to link your checking account to another account, such as savings, to cover overdrafts. However, a fee is usually charged for this protection. Alternatively, you can disable overdraft protection. In this case, any transaction that exceeds your available balance is declined.

Walsh also points out that unlike a credit card, using a debit card doesn’t affect your credit.

What is a credit card?

Although it’s also a piece of plastic that you can swipe to make purchases, a credit card works differently than a debit card. Credit cards are linked to a revolving line of credit that you can draw on as needed. You can carry a balance from month to month, but you will be charged interest. You will also need to make a minimum payment, otherwise you may be charged additional fees.

However, these advantages do not mean that there are no potential disadvantages to using credit. “Credit cards typically offer better cash back or rewards (than debit cards), but they also typically come with high interest rates and annual fees,” Walsh says. Also, since credit card activity is reported to the credit bureaus, missing payments or building up a high balance could hurt your credit score.

Are credit cards safer than debit cards?

Aside from how you can spend, a big difference between debit cards and credit cards is how fraudulent purchases are handled.

If your physical card or debit card information falls into the wrong hands, a criminal has direct access to all the money in your checking account. Anything fraudulently spent is immediately removed from your balance and you lose the money until the situation is resolved.

“If you have additional accounts linked to your debit account, such as a savings account for overdraft protection, those accounts would also be vulnerable,” says Dan Wilke, founder of personal finance blog Credit Liftoff.

Whether the situation is resolved in your favor largely depends on how quickly you are able to catch and report unauthorized charges. “Strict timelines are in place for reporting fraud, and if consumers don’t catch it early, they can be held liable for fraudulent charges,” Wilke said.

For example, if your card or PIN is lost or stolen, you must notify your bank within two business days of discovering the loss to limit your liability to $50 or less. However, if you notify your bank after two business days, you could be subject to fraudulent charges of up to $500. These rules apply to unauthorized use of your debit card as well as other electronic funds transfers, such as ATM transactions, certain online bill payments and automatic payments.

In some cases, you may not realize that the fraudulent use of your debit card has occurred until much later, such as when you review your account statements. If you notice fraudulent charges on your statement, you must contact your financial institution within 60 days. You are still responsible for up to $500 during the 60 day window, but no additional charges as long as you report on time. If you wait longer than 60 days to report the problem, you could be responsible for all transactions between the 60 day mark and the date you notify your bank, if it can be proven that notifying them sooner would have prevented these charges from occurring.

On the other hand, the Fair Credit Billing Act provides credit card users with extensive protections that are not available to debit card users, Wilke says. For example, if your credit card is lost or stolen, you are responsible for up to $50 in unauthorized charges. Often, card issuers do not hold cardholders responsible for unauthorized charges at all. And if you have your physical credit card but the account number is stolen and used to make fraudulent charges, you are not at all responsible.

Also, since credit card purchases are made on a line of credit and not directly from a bank account, your personal funds are not at risk if the card is used fraudulently. “Credit card fraud investigations can take time to process, just like debit cards, but you won’t lose money during the investigation,” says Wilke.

Advantages of using a debit card over a credit card

Although credit cards tend to be the safest option from a fraud perspective, it’s not always the best option. There are a few situations where it makes sense to use a debit card instead of a credit card:

Benefits of the debit card

  1. Helps control expenses. With your debit card, you can only spend what you have in the bank. Money-saving expert Andrea Woroch says it’s a good idea to use a debit card if you’re trying to develop better buying and spending habits, or avoid getting into debt.
  2. Save money on interest. Keep in mind that if you carry over a balance from one month to the next, you will have to pay interest on it. The average minimum credit card interest rate for someone with fair credit was 21.85% at the end of 2021. “While you work to pay off your debts, commit to using your debit card “says Woroch.
  3. To get money. Debit cards are the superior option when you need cash. Whether you go to an ATM or opt for cash back when shopping at the supermarket or pharmacy, your debit card will save you from paying additional fees or interest. “Although you can usually get a cash advance using a credit card, it will cost you in the form of a one-time fee and a higher APR for cash advances, so using debit for this reason is the way the smartest thing to do,” says Woroch. .

Credit card benefits

However, credit cards can be more advantageous in certain circumstances:

  1. Protect your finances. Credit cards offer many layers of protection, but perhaps the best is protecting your real money in the bank, Woroch says. “If someone steals your credit card and makes purchases, the charges show up in your account, but the money isn’t taken out of your bank account like you would with a debit card – which is terrifying. ” Ultimately, you would not be responsible for these purchases in either scenario. “But using a credit card means you still have access to your bank to withdraw money or make purchases, and none of your money is held while the bank investigates this fraudulent activity,” adds Woroch.
  2. Build credit. Your credit card issuer reports your spending and payment activity to the three credit bureaus each month. Keeping your credit utilization rate low and paying off your balance each month will increase your credit score over time.
  3. Buy protections. If you need to make a large purchase, it may be a good idea to use a credit card. Not only do you get a grace period on your credit card bill, but you also often get more protection on that purchase, Woroch says. For example, if the item is damaged or stolen, your card may offer purchase protection that entitles you to a refund. Your card may also offer an extended warranty or the ability to request a refund even after the deadline with the retailer or if there is a problem getting the money back from the store.
  4. More rewards. Although some debit cards offer spending rewards, Woroch says you can earn a lot more with a rewards credit card in many situations. For example, the Discover Cashback Checking account rewards customers with 1% cash back on most debit card purchases. By comparison, the Discover it cash back credit card offers 5% back in rotating categories each quarter and 1% back everywhere else.

The essential

The decision to use a debit or credit card depends on your financial situation and spending habits.

If you’re struggling to spend, Walsh says it’s wise to stick with a debit card. “The general idea is that when you pay with cash or debit card, you feel more pain subconsciously because it’s tangible and immediate,” he says.

Also, you must use a debit card if you already have a credit card balance. “Credit cards usually come with extremely high interest rates, so maintaining a balance is very expensive,” Walsh says. “Spending with a credit card not only makes it more likely that you’ll overspend, it also makes it difficult to track your debt repayment progress.”

On the other hand, if your expenses and debts are under control, using a credit card is the most advantageous option financially. “Responsible credit card use comes with obvious benefits, such as cash back or rewards, but it can also help you build credit and better manage cash flow,” Walsh says. Just make sure that if you put the majority of your purchases on a credit card, you maximize its benefits by tracking your spending, planning how you’ll redeem rewards, and avoiding unnecessary fees.