When to use debit, and when to use credit
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At a (literal) first glance, debit and credit cards can seem interchangeable. Both are small, thin, rectangular pieces of plastic that can be used in lieu of actual cash and, in most cases, bear recognizable logos, like Visa or Mastercard.
But there are some important differences between the two cards that could have an impact on the way you spend your money. Here’s what they are and why they matter, according to an expert.
One of the most important features of a debit card is that, in a lot of ways, it functions like your ATM card or cash, even though it may be swiped for a purchase like a credit card wherever Visa or Mastercard (per the logo on your card) are accepted. A debit card is linked directly to a checking account, so every time you use it, “the purchase amount will come out of your checking account,” says Beverly Harzog, a credit card expert and consumer finance analyst for U.S. News & World Report. Because it’s connected to a bank account, you may need to use a personal identification number (PIN) to validate the transaction. You can also use a debit card to get actual cash, either in an ATM or with the cash-back function during a transaction at a drugstore or grocery store. But beware: If you don’t keep track of how much money is in the checking account, it’s possible to overdraw (much like bouncing a check), which can stick you with steep fees.
When you make a purchase with a credit card, you borrow money from a credit card issuer that you eventually pay back. Doing so helps you build up your credit score, especially if you pay the full amount due by the statement due date each month (and it can also ding your score if you neglect to pay at least the minimum due each month). How much you can spend with a credit card varies. The issuer grants you a line of credit—or the amount of money you can borrow for purchases each month—which can range from a couple hundred dollars to thousands of dollars, depending on your credit history. As you approach or exceed your credit limit, your card may be denied during a transaction if you don’t have enough left to cover it.
This is the main difference between debit and credit cards—debit cards have a direct link to a checking account, which provides a clear money-in-money-out route for the account, while credit cards use the credit card issuer as a middleman, which allows the user to build credit. Some credit cards also have an annual fee, while debit cards are free—though, if you’re traveling internationally, some credit cards can be used free of charge, and debit cards may incur a foreign transaction fee.
Because using a credit card entails building up debt and paying it back, you have to be approved by the card issuer to use a credit card. Upon receiving your application, the credit card issuer will run a credit report, which will provide a credit score (ranging from 300 to 800). This number summarizes the risk the issuer will be taking in extending you a line of credit, in terms of your ability to pay off debt. The minimum score that you need to sign up for a credit card depends on the type of card that you’re looking to open.
In order to sign up for a debit card, you’ll have to open up a checking account at the bank of your choice. You can do this either in person or online at a bank or credit union, usually by presenting your name and social security number. The bank will receive a report from a service like ChexSystems, a consumer reporting agency that alerts banks to risks that may occur if a customer opens an account. A denial may occur if ChexSystems alerts the bank to any unpaid fees, overdrafts, or bounced checks in your name.
When compared to debit cards, credit cards carry more risk—if you don’t pay your bills on time, your credit could suffer, which has other negative ramifications—but they also have more benefits. The particular benefits depend on the card, but they can include cash back, travel points, travel insurance, and rental-car insurance coverage. “There are all kinds of benefits and perks, so if you get a credit card make sure you read everything to make sure you’re getting the most out of it,” Harzog says. “You might have priority boarding, you might have free luggage checking, you might be covered for a rental car. So be aware of what your benefits are, because not everyone takes advantage of them.”
Credit cards also often offer more consumer protection than debit cards. Most credit cards, for example, offer fraud protection. Also, because the card isn’t linked directly to your checking account, there’s more of a buffer if your information is compromised. “With a debit card, if someone gets your information, they can drain your account,” says Harzog. “If you have cash-flow issues that can be a major problem, even if you get the money back eventually.”
Credit cards can also be helpful in instances in which you need to make a deposit on something that will eventually be refunded, such as an incidentals fee for a hotel room. If you use a credit card, the fee will appear (and hopefully disappear) without impacting your bank balance, but a debit card will take money out of your account. This may not be a huge deal, but if you’re tight on cash, using a credit card is a good way to ensure your funds won’t be tied up in the interim between putting down the deposit and getting it back.
On the other hand, using a debit card prevents you from spending beyond your means: If you run out of money in the connected checking account, you can no longer use the card (though you may have to pay an overdraft fee). Credit cards seem like easy money until you rack up debt that you can’t readily pay off—a trap far too many consumers fall into.
Both debit and credit cards have their pros and cons—and the option you decide to use on a regular basis mostly depends on what you want to use your card for. If you’re good about keeping a budget and paying your bills on time, a credit card may be the best option for primary use. “I prefer a credit card almost all the time unless it’s a situation where I need cash,” Harzog says. “Mainly because if you’re using rewards cards for the expenses you have anyway, you can really benefit from your credit card as long as you follow the rules and pay the balance in full and on time.”
But debit cards are likely better for anyone who isn’t as regimented with their budget or wants to use credit sparingly. “With a credit card, it feels like you aren’t actually spending real money sometimes, which can be difficult for someone who has trouble sticking to a budget or tends to be impulsive at the checkout counter,” Harzog says. “It’s important to be very mindful about that. There’s no shame in that, you just have to make a choice about what is best for you personally and stick to that.”
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