Key takeaways
- Debit cards offer credit card purchasing convenience without the fear of going into debt.
- A debit card user may have more liability if a criminal uses the card to pull cash from a bank account.
- Credit cards can help boost your credit score if you keep your debt low and make on-time payments.
- Some credit cards charge annual fees while debit cards are a no-cost way to make purchases.
Sanjay is an impulse credit card shopper. He tends to buy things he doesn’t really need. A few years ago, his impulses got him into debt and it cost him a lot of money in interest and fees to climb out of the hole. He vowed to stop using credit cards. Today, he mostly makes purchases with his debit card, which gives him the discipline he needs to not spend more money than he has in the bank.
David is very disciplined with his personal money management. He likes the convenience of using credit cards for almost all of his purchases. He reconciles his card statements and pays his bills in full every month. This gives him a detailed record of every purchase by spending category for his household budget. If he times his purchases just so, he can often delay paying for items for up to 40 days because of his credit card grace period.
Two different personalities, two different methods for using plastic. In these polar opposite examples, both David and Sanjay are happy with their purchasing methods. Most people probably fall somewhere in between Sanjay and David which means they may have both credit cards and a debit card in their wallets. Here’s a look at the upsides and downsides of each type of card, to help you use them wisely.
Debit card upsides
- Spending discipline. A debit card is tied to your bank checking account. Swiping or inserting it is like writing a check. You are only spending money you actually have in your bank account and avoiding building debt that might saddle you with finance charges.
- No annual fees or interest charges. You never carry a balance on a debit card so there are no finance charges. And while many credit cards charge an annual fee, debit cards cost nothing. Access to cash. A debit card is your key to withdrawing cash from your bank’s ATM.
- An option for those with bad credit. If you have a low credit score, you might not qualify for a credit card but as long as you have cash in your checking account, you’ll likely be able to get a debit card from your bank.
Debit card downsides
- Higher liability for fraudulent use. If your debit card information is stolen, thieves can drain funds from your bank checking account. Your liability for fraudulent credit card charges is limited by law to $50, and you have 60 days to make a claim in writing to your credit card company. For a debit card, your liability is limited to $50 only for the first two days after the fraudulent debit is made and then your liability goes up to $500. After 60 days, you are liable for the full amount charged against your account, which could be your entire checking account balance. Some banks now offer debit cards with “zero liability” protection, meaning your liability for any unauthorized debits is zero. Check the fine print of your card.
- Less flexibility over merchant disputes. If you have a purchase dispute with a merchant, you may lose access to your money, which remains in the merchant’s possession while the matter is sorted out.
- Trouble tracking checking account balances. For many debit card users, it can be difficult to keep track of their account balance, because, unlike with checks, there’s no place to record debit card transactions and carry forward the new balance. If you make a charge that exceeds your available balance, your bank may impose an overdraft fee instead of simply declining the charge. This scenario has led to stories about people paying a $30 fee for buying a $3.50 cup of coffee. This problem can be compounded if you have a joint checking account and your spouse also has a debit card on the same account.
- Limited acceptance by certain merchants. In most cases, debit cards are accepted for payment just as regularly as credit cards. Some merchants may ask if your card is credit or debit, but they’ll accept it either way. However, there are some merchants who won’t accept a debit card for payment, such as rental car companies and hotels. In some of these cases, the debit card may be accepted, but the merchant will place a hold on the money in your account and it won’t be available to you for other purchases.
Credit card upsides
- Building a credit history. Responsible use of a credit card can improve your credit score and help you qualify for better interest rates on loans and perhaps even help you land a job. Just be sure to make your card payments on time and keep your balance well below the card’s limit.
- Using “float” to delay payments. Even if you pay your credit card balance in full every month, you have profited from the “float” you got between the time you made the purchase and the time you paid your bill, which can sometimes be a month or longer, thanks to the card’s grace period. You’ve had free use of this money during that time, unlike when you use a debit card to immediately withdraw money from your account.
- Keeping a spending record. Your monthly credit card statement lists all of your purchases, which makes it easy to enter them into personal finance software and track spending as part of your household budget.
- Getting rewards, miles and other perks. Credit cards have evolved to include other protections and services. For instance, some cards automatically extend a manufacturer’s warranty period. Many credit card programs include automatic travel or car insurance when the card is used to buy airline tickets or rent cars. Other credit cards offer rewards points for purchases. You can redeem your points for travel, other products and services, or get a cash award applied against your card balance. Of course, you may “pay” for these rewards if the card charges an annual fee, but the protections offered by a credit card and the rewards could make this a worthwhile expense.
Credit card downsides
- Tempting convenience. Credit cards can often feel like “magic money” in the hands of some people because of the delay between the purchase and the actual payment of the bill. This can lead to overspending by impulse shoppers like our friend Sanjay. To use credit cards wisely, you must be disciplined enough to only charge what you can afford to pay at the end of the month.
- Fees and expenses. Some credit cards do not charge an annual fee but many do, particularly if they also offer rewards. And if you carry a balance on a card, interest charges can add up fast. According to creditcards.com, the average credit card interest rate is 16.92%.*
*Average credit card interest rates fluctuate. This rate is reported as of September 19, 2018.
