Should you use a credit card or debit card on most of your transactions?
It’s a question that you’ve needed to answer ever since cards replaced cash as the most common way to transact when making a purchase. In fact, I remember when debit cards first came out it was confusing for cashiers and consumers, and many people thought they were the same thing as a credit card.
The reality of credit and debit cards is that they are quite different!
The differences between credit and debit transactions are vastly different in how your credit is affected and how a consumer is protected from scams and fraud. Not to mention, getting credit card rewards!
When you compare the differences between making a purchase with a credit card vs. a debit card, the benefits of using a credit card win every time (providing you pay the charges off in full each month to avoid being charged interest.)
To put it simply; The only clear advantage of using a debit card is the fact that you won’t have to worry about racking up credit card debt and then having to make a payment at the end of the month. There are no other benefits.
I’ll expand more on the advantage of using a credit card vs. a debit card below.
Advantage #1: Debit Cards Won’t Build Your Credit Score; But Credit Cards Will
When you use a debit card to spend money that you already have, you don’t owe anyone anything. This means that there is no way for debit cards to help you enhance your credit score when you use them.
Credit cards, on the other hand, are an excellent way to build credit. When you spend on your credit card, stay within a 30 percent utilization ratio, and pay your balance back each and every month, the activity builds up your credit score.
Advantage #2: Credit Cards Have Rewards; Debit Cards Don’t
In the past, spending on debit cards came with rewards, just the way credit cards do today. But the practice of rewarding consumers for debit card use came to an end when legislation severely limited the kind of fees that banks could earn off debit card transactions.
For this reason, it’s rare that a debit card today would come with rewards. Even when rewards are offered, those rewards rarely go over 1 percent.
Credit card rewards, on the other hand, can be generous and are much more common. The cashback that you get on certain kinds of credit card purchases can go up to 5 percent.
My Quick Silver Capital One Card gives me a nice 1.5% cash back every month, I’ve been using it for years and it’s been a big help for keeping my credit score high too.
Advantage #3: Debit Cards Don’t Protect Your Purchases Like Credit Cards
It’s very rare that debit cards offer any kind of purchase protections for consumers. And even when they do, the protection which is offered tends to be much weaker than what you can get from a credit card.
Credit cards come with extended warranties, return protection, protection against damage and theft, and many other kinds of purchase security.
Only some of the top credit cards charge annual fees for the protections that they offer.
With most credit cards the consumer protection programs are free!
Advantage #4: Credit Cards Have Better Fraud Protection Than Debit Cards
The law treats debit cards and credit cards very differently.
If you have your credit card number stolen by a thief who then spends thousands of dollars on it, you can report the problem to the issuer, and have them limit your liability to $50.
The Fair Credit Billing Act, that governs credit card issue and use, makes sure that you are protected.
Debit cards, on the other hand, are controlled by the Electronic Fund Transfer Act.
With debit cards and fraud protection it’s a bit more restricted. You have to notice fraudulent activity within two days, then your liability is no more than $50. However, if you take more than two days to report fraudulent activity your liability goes up to $500. Then, if its past 60 days, you get no protection, whatsoever.
With data breaches being as common as they are, it isn’t a wise move to use your debit card online, and leave yourself open to risk.
Advantage #5: Using Debit Cards When You Travel Can Result In Cash Being Blocked Off
When you use your debit card to book a hotel room, management needs some kind of guarantee that you’ll be able to pay for the items that you might help yourself to, such as the minibar in your room.
At a rental car desk, they need to know that if you return the car without filling it up with gas, that you’ll have enough money in your account to cover it.
For this reason, travel businesses often place a block for hundreds of dollars in your account until you pay your final bill. If you need to spend your money in the meantime, you may find that you are unable to do it.
You get around this problem by using a credit card and not a debit card.
Spending limits are usually high on credit cards, so you won’t miss the few hundred dollars that these companies put a temporary hold on. This means that by booking travel reservations on a credit card there will be no hold on any of the money in your checking account.
Final Thoughts: Debit vs. Credit Card Argument
At the end of the day, it’s your choice as a consumer whether you want to use your credit or debit card.
I’ve listed several advantages to why credit cards are better than debit cards for all kinds of different scenarios.
I think the consumer protection is the biggest benefit overall!
Now, it does not mean to go out and just charge up your credit cards. Just be aware of when it’s best to use a credit card or a debit card and be financially responsible!