Credit Cards vs. Debit Cards: How They Differ and the Benefits of Each

Whether you already have a credit and debit card or are considering getting one, it is important to understand how they differ and the benefits of each. While both cards can typically be used interchangeably, there are instances where it is more beneficial to use one over the other, whether for added buyer protection, to avoid fees, or to obtain rewards or cash back. Therefore, understanding the advantages provided by both card types will help you maximize your benefits every time you make a purchase.

Debit Cards

Debit cards are linked directly to your checking account. While some savings accounts also offer debit cards, this is not common. Additionally, the purpose of a savings account is to save for the future. As such, it is counterproductive to make frequent transactions from a savings account. Additionally, most banks have withdrawal limits that limit how many withdrawal transactions you can make in a month without incurring a fee. When you make a purchase with your debit card, the funds are automatically deducted from your account. As such, you need to track all your transactions (deposits and withdrawals) to monitor your account balance and avoid overdrawing your account, which will incur an overdraft fee, unless you have overdraft fee protection. This process of recording and tracking transactions is known as “balancing your checkbook.” The term is somewhat antiquated, as it is now rather rare for most consumers to write checks. However, you still need to balance your checking account by recording all your transactions and checking those transactions against your monthly statement or online account to ensure the balance matches. If there is a discrepancy, you will need to determine if it is due to a calculation error or potentially an unauthorized charge.

Debit Card Pros:

Money is in your account: one of the primary benefits of using a debit card is you must have the money to spend it. If there is no money in the account, your transaction will be declined, meaning you cannot go into debt. However, overdrawing your account will result in overdraft fees, which vary by bank but are typically around $30. Therefore, if you have multiple overdrafts, then you could technically make yourself indebted to the bank in fees. This can easily be avoided by tracking your spending and ensuring you maintain a minimum balance in your account. Most checking accounts do not require a minimum balance, but this is a best practice to avoid the potential for overdrafts. Therefore, it is recommended you establish a baseline balance and stop spending when you approach this self-imposed limit.

Ability to withdraw cash at no fee: debit cards allow you to access ATMs around the globe and withdraw cash directly from your checking account. This is a great benefit, as it allows you to access cash when you need it without having to carry around excessive cash. Having some cash on hand is valuable during emergencies but too much cash increases the risk of theft or loss. It is important to note that while most banks do not charge an ATM fee at their ATMs or partner bank ATMs, there is typically a fee imposed to use ATMs outside this network. Certain checking accounts will waive ATM fees up to a certain dollar value. For example, your bank may waive up to $15 in ATM fees per month. In such cases, you will see an ATM fee on your statement followed by a reimbursement transaction. If you are only making a few withdrawals each month, this will likely cover the costs.

Debit Card Cons:

Less secure: although debit cards are beneficial for multiple reasons, it is important to keep in mind that they are linked directly to your bank account. As such, if your debit card is lost or compromised, the party responsible will have access to your entire balance. Given the loss of the entire balance would have a significant financial impact, you must be vigilant to safeguard both your physical card and personal identification number (PIN). Typically 4-6 digits in length, the PIN is a number you designate that is needed to make ATM transactions as well as verify your account in certain instances.

Overdraft fees: while debit cards help you avoid excessive spending and debt, there is also the potential for overdraft fees. Failing to utilize your card responsibly will result in hefty penalties. It is important to know that these penalties are usually charged per transaction, so multiple transaction attempts when your balance is insufficient can result in an accumulation of fees.

Fraud protection varies by bank: debit cards are starting to offer more fraud protection than in the past. However, they are still well below the protections offered by a credit card. For this reason, in most cases, a credit card is the preferred method of purchase to protect yourself from theft and fraud. Be sure to verify the protections offered by your bank.

Credit Cards

Credit cards offer many benefits and are extremely useful when used responsibly. A credit card gives you access to a line of credit (loan) provided to you by a bank. This line of credit is then repaid at an established interest rate, which typically ranges from 19% to 29%. If you pay off the credit card each billing cycle before the due date, then you will never pay any interest. However, if you carry a balance over from one month to the next, you will be charged interest on that balance. Given the high interest rate charged by most credit cards, you should make every effort to pay off your balance every month and treat the line of credit like cash. If you do not have enough cash to cover the transactions, then avoid using the card. You will still have the ability to spend beyond your means, so this is where you must exercise self-discipline and stick to your “budget.”

Credit Card Pros:

Buyer protections: a substantial benefit of using credit cards is the associated buy protections. Credit cards offer fraud protection that far exceeds that of debit cards. Additionally, the card is not linked directly to your checking account, so the compromise of your card does not allow access to all your funds. The fraudulent transactions can still be significant, depending on the line of credit available. When you see an unauthorized transaction, you should immediately dispute the charge with your credit provider. When you dispute a charge, your credit provider will investigate the charge. This investigation may take 60-90 days, but while under dispute, the amount is credited back to your account. As a result, you will not be required to pay it or charged interest on this amount unless it is determined that you are responsible for the charge. In addition to fraud protections and the ability to dispute charges, many card providers offer added benefits, such as extended warranties or buyer protections. If you purchased a product on your credit card and it malfunctions or is stolen, first reach out to the merchant. If the merchant is unwilling to resolve the issue, verify the protections offered through your credit card. You may very well be covered.

Earn cash back or points: the majority of credit cards will offer points or cash back for spending within certain categories. It is important to understand these benefits to obtain value from purchases you already planned to make. You should not make purchases solely due to the rewards you will receive, so avoid falling into the trap of spending money to get points or cash back. Cash-back and point categories can be confusing, as you may only receive cash back when spending on travel, groceries, gas, or another designated category. As a result, if you have multiple credit cards, you will need to understand the benefits offered by each and utilize them appropriately to maximize the benefits received. Check out this article if you want the “Best Everyday Credit Card” to get cash back on every purchase.

Build credit: another benefit of credit cards is the ability to build your credit. Your FICO credit score is a number between 300 to 850 that lenders use to determine your creditworthiness. The higher the score, the easier it will be for you to obtain credit and the lower the interest rate. As a result, obtaining the highest credit score possible comes with a lot of perks. In many cases, your credit score will also influence your ability to rent an apartment or condo. Having a credit card does not automatically improve your score. Rather, your score is improved when you make your payments on time and utilize your credit responsibly. Late payments will substantially lower your score, so avoid missing a payment. The easiest way to do so is to set up automatic payments (autopay). In addition to paying on time, you should avoid maxing out the card. Try to keep your credit balance below 30% of the available credit line. For example, if your credit line is $3,000, attempt to keep the balance below $900. There may be times when you need to make a larger purchase, but you should not consistently maintain a high balance.

Credit Card Cons:

Debt: using a credit card irresponsibly is an easy way to quickly accumulate debt. Because you do not have to have cash available at the time of purchase, consumers can spend substantial amounts of money (up to their credit limit) in a short period. This is what lenders want because they profit when you pay interest. Make your credit card work for you by only buying what you can afford and paying it off each month to avoid interest.

Interest: while it is easy to avoid interest by paying off your balance each billing cycle, failure to do so typically results in double-digit interest rates. A large balance left unpaid will reduce your purchasing power as more of your money is going to pay for interest. It is possible to never pay any interest on a credit card, so make every effort to avoid carrying a balance over from one month to the next.

Annual fee: many credit cards have no annual fee, but this is something to consider when opening your card. Unless the card offers benefits that you value above the fee they charge, it is best to avoid annual fees and go with one of the many great cards that do not have annual fees. If you already have a card with an annual fee, contact your provider and find out if there is a no-fee card to which you can downgrade. The benefit of downgrading is that you will not have to open a new card or close your existing card. The card will be redesignated as the card type you requested and issued to you with the same number. Keep in mind that you may be restricted to downgrading to a card within the same product category.

Conclusion

Credit cards and debit cards offer numerous benefits. If you use them responsibly and understand the pros and cons of each, then you can take advantage of fraud protection, access cash when you need it, and earn cash back or points on your everyday purchases. In general, credit cards offer more benefits, have better fraud protection, and will also help you build your credit if you make payments on time and monitor your credit utilization. Debit cards help avoid excessive spending and allow quick access to cash when you need to make a withdrawal.