Debit Card v. Credit Card-What’s Best for You?
You have two big options when it comes to the plastic card we all pull out of our wallets to pay for things. They all might have 16-digit card numbers and expiration dates, but one big difference relates to whether using it creates a loan or a direct withdrawal from your bank account.
Credit cards allow you to borrow money from the credit card company, up to a certain limit, to purchase items or pay for services. When you use a credit card you are getting an interest free 30-day loan from the credit card issuer. If you don’t pay it back in full by the next billing deadline, then interest begins to accumulate on the unpaid balance.
Debit cards allow you to spend money directly out of your bank account, and thus the transaction causes an immediate deduction to your bank balance. There is no borrowing involved when you use your debit card. If your bank account doesn’t immediately have funds to cover the transaction, either the purchase won’t go through, or you will be subject to overdraft fees on the account.
Which card type if best for you? It depends on what you deem to be important. Here are the factors:
- If you want to build a credit history to enhance your credit report, then the credit card helps. On-time payments, low credit utilization ratios (i.e. relatively small purchases compared to your limit) help build your credit score…but the opposite is also true. If you are late on payments or max out the card frequently your credit score will take a hit. Debit cards have no effect on your credit score because they are direct payments from your bank account.
- If you want guardrails for your spending, then a debit card is the way to go because you can only spend what’s in the account (or be subject to overdraft fees). Because it’s a loan, you don’t have to consider how much you have in the bank when you whip out a credit card. Some people get into financial trouble and high interest debt with a credit card. That’s difficult to do with a debit card.
- If you want the option to dispute a purchase after the fact, the credit card wins. The Fair Credit Billing Act allows credit card users to dispute purchases through the credit card company. With a debit card, the money is out of your account by the time you put the debit card back in your wallet, and you have to get the merchant to reverse the transaction — Not so easy.
- Fraud protection is important. Credit cards always had the advantage here, but more debit card companies are starting to add fraud protection, too. However, since a debit card is linked directly to your bank account, a fraudulent purchase can immediately drain your account while credit card fraud has no immediate impact on your bank account because you pay for it later.
- Debit cards don’t have an annual fee while credit cards do. But credit cards offer cash back rewards while debit cards have much more limited cash benefits. This one’s a toss-up.
There is no right answer in the debit card vs. credit card debate. It all depends on what factors are most important to you. I hope the factors above help in deciding what’s best for you.
Fun Fact: Halloween pumpkins derived from Irish immigrants. Irish folklore includes the story of “Stingy Jack” who when he died was not allowed into Heaven or Hell and so he wanders the earth for eternity. To keep him away from their homes, people in Ireland would carve scary faces out of turnips to display. When Irish immigrants moved to America, they found pumpkins more prevalent and bigger to carve on, so they started using them to carve “jack-o’-lanterns” to ward off souls trapped between worlds as well as evil spirits.
