Debit vs Credit Cards: The differences and benefits of using credit cards responsibly
Credit Cards

Debit vs Credit Cards: The differences and benefits of using credit cards responsibly

EPF Last Update: September 21, 2018

Debit and credit cards are very similar looking. Both have a logo of a major credit card network like Visa or Mastercard, and both permit the purchase of goods or services. However, there are quite a few differences that may influence which card you’ll pull out when you make your next buy.

Debit Cards

Debit cards have the convenience of no monthly bill, annual fees, or high interest fees that come if you can’t pay off credit cards. A debit card draws straight from your checking account.

If a transaction goes through when there’s no money left in the account an overdraft fee occurs as a penalty, causing you to owe the bank. To avoid this it’s important to stay up to date with your account balance after each sale. 

Credit Cards 

Credit cards allow you to make purchases by drawing from a line of credit. You’re granted a certain amount you can borrow on your card at one time, better known as a credit limit.

Card issuers determine your credit limit after reviewing your credit history. Your credit history comes from one or more of your credit reports, which contain information like your previous credit card providers, credit utilization, and the length of any prior accounts. A credit card issuer will also ask for your income on the application, which isn’t on your credit reports, but affects the credit limit decision.

With credit cards, you’re subjected to paying interest on their purchases if you don’t pay the card in full at the end of each billing cycle. If your credit utilization remains high for a long period of time your credit scores are negatively affected.

The Advantage of Debit Cards 

The determining benefit of using a debit card is that they keep you from spending money you don’t have. This is a huge factor for compulsive spenders, or those who lack discipline with spending throughout the month.

Poor money management with a credit card leads to low credit scores, and increased debt. If you don’t have disciplined spending, a debit card will be much easier to handle.

Beyond potential debt prevention, a debit card usually has no annual fees or interest. However, debit cards offer less consumer protection options if the card is stolen, or used without your permission. Once you notify your bank or credit union within two business days of discovering the loss or theft of the card, the bank or credit union can’t hold you responsible for more than the amount of any unauthorized transactions or $50, whichever is less.

Debit cards offer simplicity since there’s no application process or waiting to hear back on your approval. Once you open a checking account, your bank gives you a debit card through the bank. There’s usually no concern about having enough money to pay off your expenses, and it’s one less bill at the end of the month.

You can use a debit card many places, and the merchant typically pays lower fees for the transaction. There are some places credit cards are accepted and debit cards are not, however, like when booking a hotel room or rental car.

The Advantages of Credit Cards 

Credit cards provide more security and less risk. You’re spending a lender’s money and there’s a grace period before your payment is due. During this time, you’ll be able to dispute and remove any charges if you lose your card. You are not held liable for fraudulent credit card use, so you don’t need to worry about theft as long as you report your card as lost or stolen immediately.

Keeping your credit card accounts open and using the cards responsibly contribute to building a strong credit history. Besides getting approved for credit cards, your credit history affects whether you’re approved for an apartment, mortgage, automobile or student loan. Attempting to apply for any of these without establishing credit is nearly impossible.

There are many cards that come with sign-up bonuses and rewards that make the annual fee worth it. With debit cards, you’re spending your own money and usually get no benefits when you use your card. Whereas if you have a rewards credit card:

  • Cash back, with more on certain categories like gas or groceries
  • Reward points, which sometimes come in the form of airline miles

Which Card Is Right for You? 

Deciding which credit card is right for you depends on your spending habits, and your lifestyle. Overall credit cards are more secure than debit cards, and offer more benefits on everyday spending for things like gas, groceries, restaurants.

The key to using credit cards is employing them as a tool to build credit or gain rewards. Make sure to pay off any balance in full by the end of each month. By keeping your credit utilization low and avoiding debt, you’ll increase your credit scores. You’ll also earn the opportunity for higher spending limits, and greater rewards.

If you are working to build your score, adding a new line of credit and using it responsibly can help repair or increase your credit trustworthiness. Debit cards permit fast access to cash without worrying about having the money to pay off your purchases at the end of the month but they have no effect on the state of your credit scores.

The Takeaway 

Ultimately, neither type of card can take control of your finances or manage them for you. Being fiscally responsible is a decision you have to make on your own. Both credit and debit cards are tools that can help or hurt your bank account depending on your financial literacy, and desire to create a solid financial future.

Elite Personal Finance

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