Credit Cards and debit cards are all part of everyday commerce in the United States and all around the globe. However, in terms of purchasing goods and services, which one of these is the best to use? Is a debit card truly a better way to go about purchasing goods, or is a credit card a better, safer alternative?
Altough credit cards and debit cards look identical, with the 16-digit card numbers, magnetic stripe, security chip and everything in between, the funding sources and the underlying rules and restrictions are different.
Debit cards allow customers to purchase goods and services by drawing funds directly from their checking account. This means that anything you buy with a debit card will be deducted from your bank’s checking account. On the other hand, credit cards allow customers to use the bank’s issued credit to purchase goods, under the agreement that these transactions will be paid back at a later time (with an added interest charge).
Let’s go over the main aspects of the two types of cards and compare in more detail.
Fees
The fee structure for credit cards and debit cards is inherently different. For debit cards, there may be no fees attached to their use (this depends largely on your bank). Exceptions include things like overdraft fees (spending more money than you have on your account). On the other hand, credit cards can charge late fees, annual fees, over-limit fees and a plethora of other fees, on top of the interest rate on your balance you’re responsible for.
The fee structure for credit cards is much more elaborate, while the debit card fee structure is simple. Ultimtely, a responsible card user can avoid debit card fees completely.
Winner: Debit card
Control of Spending
As we mentioned previously, using a debit card to purchase goods and services draws money from your checking account. Hence, spending more money than you have at your exposal is discouraged completely.
By using debit cards, chronic spenders who purchase goods and services impulsively can avoid the temptation of using credit because of limited funding and of course, fear of potential overdraft fees associated when overspending with debit cards.
Credit cards, when in the wrong hands, can lead to compulsive buying habits and ultimately, crushing credit card debt. Using credit cards doesn’t carry the same spending control as with using debit cards and the unpaid balances at the end of every month carry more and more weight after every payment cycle, resulting in paying more than you originally borrowed.
Winner: Debit card
Rewards
Users of certain credit cards can reap rewards for actively using their credit card. Credit card companies encourage their users to spend more, in exchange for rewards points for each dollar spent (this largely depends on the specific credit card). Users can reap cash rewards, discounts on goods and services, travel points and many other perks.
Responsible credit card users who pay off their purchases every month can reap tremendous benefits by paying their daily expenses through their credit card and reaping regards in the process. On the other hand, debit cards offer no such benefits to their users.
Winner: Credit Card
Credit History and Credit Profile
A good credit score opens up many opportunities when it comes to top tier rewards credit cards, mortgages, auto loans and so much more.
One of the easiest ways to build up a strong credit history is using credit cards and paying them on time. Paying off at least your monthly minimum payment on a month-to-month basis for consecutive years will have a lasting, positive impact on your credit score and your credit profile.
After each month, your credit card usage and payments are reported to the three major credit bureaus. Nevertheless, your best bet in improving your credit score is making your monthly payment as well as keeping your credit utilization at a minimum.
Winner: Credit Card
Fraud Protection
If your debit card is stolen or missing, it’s possible to lose your entire bank balance if your case isn’t reported within 60 days. If, for any reason, there is an internal investigation associated with your bank account, your funds may become unavailable for weeks, which could cause lasting havoc in your life for days to weeks.
On the other hand, thanks to zero-liability fraud protection policies for credit cards, falling victim to credit card fraud may mean that you won’t be liable for any money that is lost or stolen. After all, the funds (or credit line) that is associated with the card is the bank’s money, so it’s always in their best interest to do anything they can to retrieve the funds in the first place.
If you’ve had the experience of trying to reverse charges on both your debit card and credit card, you probably noticed how much easier it is to initiate a chargeback on your credit card than having a transaction on your debit card overturned.
Winner: Credit card
Conclusion
It’s clear that using credit cards has a much greater potential benefit than using your debit card. Everything from gaining rewards, to fraud protection to building a good credit profile, a credit card carries far more potential for positive, but also the risk of long-lasting debt and financial hardship. For compulsive spenders, it's always a better to use a debit card (or look into charge cards). However, for the financially responsible user, there's no reason why using a credit card shouldn't become a staple in your day-to-day financial transaction.