Debit or Credit? Which One to Use and Why

Estimated read time: 5 minutes

There are many important financial decisions you must make in your life. These come in all shapes and sizes. One of the more important and frequent decisions you will have to make is whether to use debit or credit.

Which option you choose depends on a number of factors. These include the size or the purchase vs. promotional APR, if you have a cashback rewards card, or any other incentive to using one over the other.

Of primary importance is knowing the balance of both your credit and debit cards. After that, the decision becomes more complicated. Let's explore.

Types of Debit and Credit Cards

Debit cards are used for transactions where an individual will be taking money directly from their bank account. Credit cards are used for transactions where an individual will be taking advantage of credit extended by a credit card issuer.

Credit cards fall into four categories:

  • Standard credit cards
  • Rewards credit cards
  • Secured Credit cards
  • Charge credit cards

Standard credit cards are the most basic form. They simply provide a line of credit. Rewards cards do this and also offer a number of incentives for making purchases. These include cash back rewards and travel rewards.

Your credit score is one of the most important numbers in your financial life.

Secured credit cards are typically used by those looking to repair their credit. They require a cash deposit at the time an account is opened in order to secure the account.

Charge credit cards don't have a spending limit, but they often require balances to be paid each month.

Debit cards can be divided into three categories:

  • Standard debit cards
  • Electronic Benefits Transfer (EBT) cards
  • Prepaid debit cards

Standard debit cards provide consumers direct access to the funds in their individual bank account.

EBT cards are debit cards issued by government agencies that provide consumers access to their provided benefits. A common example are food stamp cards.

Prepaid debit cards, meanwhile, allow consumers to make purchases with a card that has been preloaded with a dollar amount. These are common for those who don't have access to a bank account.

Debit Cards Are More Frugal

One of the biggest differences between debit cards and credit cards is the potential fees associated with the accounts. In this regard debit cards prove more beneficial for those who are frugal or looking to avoid higher fees.

To open a debit card normally requires opening a bank account. While some bank accounts do require you to maintain a minimum balance or make an initial deposit, you shouldn't be paying any fees for that checking account (otherwise it might be time to find a new financial institution).

Make sure to keep track of your account balance, however, as overspending on your account can lead to overdraft fees.

Debit Cards Help You Spend Within Your Budget

Debit cards are a great option for those who need to stay within a particular budget. As they provide access to what money you actually have available (that is, the money you have earned and have access to in a bank account), there is no big potential to overspend past a desired limit.

This does not mean you don't need to budget appropriately. You could still get yourself in trouble if you have signed up for overdraft protection. Spending more than you have in that scenario would lead to either large overdraft fees or racking up more debt on your credit card if it is linked to use in case of an overdraft.

Credit Cards Offer Rewards and Perks

There are plenty of advantages in using credit cards for those who know how to responsibly manage their finances. These include credit card rewards, perks, and allowing individuals to pay bigger purchases off over a period of time rather than all at once.

  1. Credit Card Rewards -

    Credit card rewards come in many shapes and sizes. From cashback rewards that provide a percentage of purchases back to the cardholder to travel rewards, card issuers have many deals related to attracting more consumers.

  2. Perks of using credit cards -

    The perks of using credit cards extend beyond typical credit card rewards. There are particular perks related to car rental services and other industries that give consumers access to discounts at a number of vendors. As long as you use your credit card in the transaction, you'll get access to a variety of discounted perks.

  3. 0% APR offers on big purchases -

    Big purchases are intimidating. Make them less so with a credit card. Credit cards often allow consumers to benefit from cards with 0% APR offers. These offers allow you to make payments for big purchases over an extended period of time without interest.

Credit Cards Help Your Credit Score

Credit cards are a type of loan and, therefore, are reported to credit agencies that then determine your credit score. Your credit score is one of the most important numbers in your financial life. That's why it is important to maintain a decent credit score and learn ways to improve it.

A credit card can help your credit score so long as you maintain a sound credit utilization ratio, make your payments on time, and don't open too many new accounts in a particular time frame.

Credit Cards Are Safer

Another advantage of credit cards is that they are generally more secure. While debit cards provide basic layers of protection and fraud reimbursement, credit cards take consumer protection to another level. Outside of general card problems that may be encountered, credit card issuers have an array of fraud protections that allow for quick and easy resolution of card disputes.

What's more is that they often employ fraud detection services to prevent any fraudulent or flagged purchases from taking place in the first place. Federal law also states that consumers can only be responsible for $50 of a fraudulent purpose so long as the credit issuer is notified within 60 days of a fraudulent transaction appearing on a statement.

And The Winner Is…

There are advantages to both debit cards and credit cards. If you are financially responsible and know how to manage your money, credit cards are the clear winner when it comes to making purchases. They not only provide you access to a higher spending limit but do so while offering you a number of rewards, perks, and payment options. Add to that fraud protection and premium services, and credit cards are a great way to responsibly manage and enhance your financial portfolio. Just make sure to be responsible and understand any terms or agreements you enter!