Credit Cards vs. Debit Cards: When to Use What

According to a survey by Chime Bank of 1,262 people in the Millennial demographic, 68 percent of those people prefer to use debit cards over credit cards. Some of the reasons for this were to avoid compiling debt and to have more transparency with the financial institution.

However, there are distinct benefits to both debit and credit cards. For some people, depending on their condition, control or lack thereof over impulsive spending, access to a bank, or credit history, one card will suit them more than the other. First, it’s helpful to know the types and options of cards available.

Types of Debit Cards

  • Standard debit cards, the kind most people are likely to carry with them, pull money out of your bank account. Purchases can generally be seen posted to your account on the same day.
  • Electronic Benefits Transfer, or EBT debit cards, are issued by your particular state and federal agencies. These cards allow qualified individuals to use the card benefits to make purchases. These are generally for elderly or disabled individuals or households that qualify in this way.
  • Prepaid debit cards give individuals without access to a credit union or bank account a way to make electronic purchases. These work in a similar way to prepaid phones, you can spend only the amount that is first loaded onto the card.

Types of Credit Cards

  • Rewards credit cards offer incentives for making purchases with the card. This can be cash back, generally ranging around one to two percent, travel rewards, gift certificates or more specified rewards for a specific store or company.
  • Balance transfer credit cards are primarily meant for people who already have high credit debt. You can transfer your existing debt onto these cards and get anywhere from six to 21 months to pay it off interest-free. Many have an initial balance-transfer fee of roughly five percent. Make sure you watch the interest rate on these after the interest-free period is over.
  • Secured credit cards are generally meant for individuals who have lower ranking credit scores. These require collateral, usually equal to the credit limit, to use the card. If you always pay your card bill on time, you will get the deposit back. If you don’t, the card company will take the unpaid amount from the deposit.

Pros and Cons of Using a Debit Card

Debit cards have their own set of advantages, one of the biggest being the avoidance of accumulating debt. Notably, with individuals who do not keep a regular eye on their credit card accounts, it can be too easy to overspend and rack up major debt before you know it.

It’s harder to do this with a debit card, you might empty your account, but your card will not be approved for purchases if you extend beyond what is already in your bank account. With a debit card, many people will have a better idea of how much they’re spending.

However, they are far less secure than credit cards. While credit cards might have those frustrating interest rates or annual fees, they are held to far stricter liability laws.

Consumer liability for credit card fraud maxes out at $50. That means, even if someone steals your credit card or the number and spends $20,000, if it’s proven to be theft, you will only have to pay a maximum of $50 on that fraud.

Initially, debit cards have a $50 consumer liability rate. However, if two days pass before you report the theft or suspicious purchase, that amount bumps up to $500. Beyond those first 60 days, you could be liable for the entire amount.

Pros and Cons of Using a Credit Card

Credit cards, on the other hand, do one crucial thing for you that debit cards do not, they build a credit score. While irresponsible use of a credit card can backfire and lower your credit score, keeping an eye on your account, paying at least the minimum balance and keeping a reasonable amount of debt or none at all can be a significant benefit.

When it comes time to buy a home, purchase or lease a car, or apply for another type of loan, it can be difficult to be approved by lenders without a credit score. Even if you do get a loan or line of credit, you’re likely to have a higher interest rate than people with good or excellent credit.

Rewards, especially when the card user pays their card off monthly, can be a significant benefit, as well. Cashback is one of the most popular card rewards. However, some credit cards offer some fantastic bonuses. You could get a monthly cash amount off Amazon purchases, some cards offer perks such as travel insurance, VIP packages and for specific stores, discounts on their products.

One of the biggest downfalls of credit cards is that it can be too easy for some people to acquire massive amounts of debt. This is definitely not an issue to gloss over if you are not hyper-vigilant about your card use.

When to Use What

As a general guideline—and be sure to use your own common sense with your situation—these are recommended times when you should use a debit or credit card:

Use a Debit Card

  • If you tend to overspend or do not keep track of purchases
  • If you are buying something you want to pay for that day (not be in debt for)
  • If you neglect to pay bills on time
  • If you have a low credit limit, as it can be wise to save most of your credit line for unexpected emergencies

Use a Credit Card

  • If you always pay bills on time
  • If you keep track of your spending and firmly grasp that you will have to pay off that purchase quickly
  • If you need to build credit and are using it for smaller acquisitions that you can pay off quickly
  • If you plan to pay the balance monthly or within a couple of months and get notable rewards for card use

When it comes to acquiring debt, you must be very honest with yourself about how vigilant you are with your finances. Many people find it helpful and smart to have credit cards enrolled in autopay for the balance minimum. You can always pay off more, but this will prevent you from missing payments and taking a hit on your credit score.

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