As more people are cutting back on their spending and are paying more attention to managing their financial affairs, many have made the decision to cut out credit cards from their life and rely solely on cash or debit cards. It can be a good plan if you can’t trust yourself with credit cards. But there are differences between credit and debit cards that may affect you more than you think.
What’s the Difference Between Credit Cards and Debit Cards?
When you are making purchases on a credit card, you are essentially using the money you borrowed from the financial institution that issued the card. The bank pays the debt and you are obligated to pay the money the money back with interest each month.
Credit cards are generally accepted in all retail locations, restaurants, gas stations, e-commerce sites, and for bill payments. They can be used to reserve hotel rooms, rental cars, or airline tickets.
When you make a purchase using a debit card, you need to already have the cash necessary in your bank account. Debit cards will subtract the money used for the purchase directly from your bank account.
Unlike credit cards, debit cards are not always accepted from retail merchants and other businesses. Those that do accept them, such as car rental agencies, may also require significant deposits or proof of income before a debit card can be used for reservations. For example, it’s not uncommon for car rental agencies to place a large hold on your debit card if you use one to rent a car.
Are Credit Cards Better than Debit Cards?
There is no easy answer to this question because there are pros and cons to each method of money management. There are several factors to consider and depending on your own financial situation, you may find that one works better for you than the other or you may use both equally as often.
Here are some considerations:
Creditworthiness
In order to get a credit card, you typically need a good credit score because must undergo an application process and a credit check. People with low credit scores may not qualify for a line of credit from a financial institution, though they may be able to apply for a secured credit card, which requires a deposit.
With debit cards, typically any consumer with a bank account can link a debit card to their funds with being approved based on credit histories.
Consumer protection for credit and debit cards
Credit card companies have liability laws that obligate the consumer to be liable for $50 in the event of fraud. You have 60 days to report fraudulent charges or activity for the credit card company to investigate. Credit card companies also offer assistance with purchase issues and can act fast should your card be stolen.
Banks limit the liability of consumer to just two days in the event of debit card fraud. Any information reported after that time increases the liability to $500. Chances are good that many consumers will not notice something amiss in just two days.
There is generally no additional warranty assistance on purchases made using a debit card.
Thieves can drain a bank account if they access your debit card.
If your debit card is stolen or lost, the entire account is at risk until the loss can be reported and investigated. Bank accounts can be frozen until the investigation has been completed so consumers may have limited access to their money.
The worst possible outcome is having your main checking account drained, leaving you without funds until the bank has the opportunity to conduct an investigation and reverse the charges.
A friend of mine was stranded while on vacation when his debit card was stolen. The thieves emptied his bank account, leaving him with no money to get home. After pleading with his bank, he was able to arrange to have several hundred dollars in his account – just enough to pay for gas and food while he drove home. What a terrible way to end a vacation!
Emergency Source of Funds
Credit cards are good in the event of an emergency. The line of credit allows for purchases to be made within the credit limits. Using a debit cards means you need to have the cash on hand to help when something happens.
Impulse Buys
If you are spending on credit, you may be inclined to spend more recklessly than if you had cash in hand. Credit card use can be tempting when you are not budgeting your cash properly and can lead to overspending and an inability to pay the bill. With a debit card, you can not spend more than you have, which helps prevent impulse spending.
If you are prone to impulse spending, stay away from credit cards!
Rewards on Purchases
Both credit cards and debit cards can offer rewards on everyday spending. However, credit card rewards are generally much more generous than debit card rewards.
Debit card rewards: To begin with, very few debit cards offer rewards. Those that do may only offer a limited reward, such as $0.10 cash back on each purchase. In general, debit card rewards won’t make much difference to your bottom line.
Credit card rewards: Credit cards, on the other hand, can offer extremely generous rewards, including cash back, rewards points, airline miles, hotel program points, and much more. Many credit cards also offer generous sign-up bonuses, often reaching several hundred dollars in value.
Of course, credit cards aren’t for everyone, as they can entice some people to overspend and carry a balance.
Personally, I’m a fan of credit card rewards. But I set all of my credit cards on autopay and automatically have the full balance drafted directly from my checking account each month. (I also manually verify each purchase on the monthly statement, and I only spend what I can afford).
Earning credit card rewards on our normal spending has provided my family and I with several thousand dollars in cash rewards, free flights, and free hotel stays. Learning more about credit card rewards programs can have a significant financial impact.
Tips for Choosing Between Credit Cards and Debit Cards
Again, there are pros and cons to both. My recommendation is to examine your financial habits and make the decision that best meets your needs. And if you decide to use either one of them, then I highly recommend reading the fine print.
You want to sign up for a credit card or debit card that doesn’t have any monthly or annual fees and if you can, it is best to use a credit card or debit card with rewards programs so you can take advantage of cash back offers, rewards points, or other benefits.
Here are some options:
