Consumers used credit cards for 27% of payments in 2020, and debit cards for 28% of payments, according to data from the Federal Reserve Bank of San Francisco’s Diary of Consumer Payment Choice. 19% of consumer transactions included cash.
According to this information, debit and credit cards are used at almost the same rates. How do you decide which to utilize over the other as a consumer?
Both credit and debit cards provide better spending tracking and facilitate online transactions as compared to cash.
Each, however, has unique benefits and drawbacks. To help you use each card responsibly, we’ve listed the benefits and drawbacks of debit and credit cards in this post.
What’s the difference between debit and credit cards?
You may make purchases and cash withdrawals with both debit and credit cards, but there are some important differences.
Debit and credit cards differ primarily in how they operate as a means of payment. When you use your debit card to make a transaction, money is immediately taken out of your checking account.
When you use a credit card to make a purchase, you borrow money from your credit card company rather than having money taken out of your bank account right away.
With debit cards, since your transactions are automatically deducted from your bank account, you won’t have to worry about getting a monthly bill.
You will, however, get a monthly statement showing your credit card amount if you use a credit card. You can choose to make the bare minimum payment, your entire sum, or any amount between the two.
But, if you carry a balance from month to month, interest will be charged. You can avoid interest and late penalties if you pay your debt in full and on time.
We’ll then examine the advantages and disadvantages of debit and credit cards so you can make the most of each.
Pros and cons of debit cards
You may learn more about the benefits and drawbacks of debit cards to determine when they’re useful and when a credit card would be a better choice.
A debit card is often a smart choice if you want a quick method to withdraw money from your checking account or make complete payments on transactions.
Debit cards could be an excellent approach to make sure you don’t spend more than you have because these purchases immediately deduct money from your account.
Debit card transactions, however, offer poor fraud protection and may result in overdraft fees. Read on to learn more about the benefits and drawbacks of debit cards.
Pros of debit cards
Debit cards provide the following advantages:
- These are really practical. They are commonly accepted by merchants and quicker to use than writing a check. Whether you need to use an ATM to receive cash or when you want to get cash back after making a transaction, debit cards are very practical.
- Often, they don’t charge an annual fee. You won’t pay anything to keep your debit card active, even if you hardly ever use it. The monthly fees for your bank account, however, could apply.
- They can aid in budgeting by deterring extravagant expenditures. A debit card can assist you in keeping track of your spending because funds are promptly taken out of your checking account when you make transactions. You could avoid overspending on major, impulsive purchases by using a debit card.
- There is no interest added. Debit card payments deduct funds from your account immediately, so you don’t build up a balance on which to charge interest. The main distinction between a debit card and a credit card is this.
Cons of debit cards
Debit cards provide the following advantages:
- They have a bare minimum of fraud defense. You may be liable for up to $50 of any fraudulent transactions if you report the theft of your debit card to your bank within two days, according to the Federal Trade Commission. If you alert your bank after two business days, you might be liable for fraudulent charges up to $500. If you don’t report the false charges to your bank within 60 days, you can be held responsible for them altogether. Avoid using your debit card for online purchases since they often offer less fraud protection than credit cards.
- Your spending cap is based on the balance in your checking account. The best option for major costs that exceed your account balance or those you’d want to pay off over time is not a debit card, but it is an excellent choice for minor transactions. Although it’s best to budget for major purchases, using a credit card is another method to make ends meet.
- These might result in overdraft costs. If you don’t keep a careful eye on the amount of your checking account when using a debit card, you might overdraw money from your account. By levying a fee for overdraft permission, these transactions are made possible. If you choose not to consent to overdrafts, transactions made with a debit card that you cannot afford will be rejected.
- Your credit score is not increased by them. Debit cards have no impact on your credit score because they are connected directly to your checking account. Debit cards won’t help you if you want to establish a credit history.
Pros and cons of credit cards
Cashback rebates and robust fraud protection are just two of the numerous benefits that credit cards provide.
Large purchases can also be financed using them. Getting a credit card might be an excellent alternative if you’re trying to establish your credit history.
There are a few drawbacks to credit cards, though. A high amount might result in accumulating interest and costly payments that you might not be able to make.
You may use a credit card calculator to see how long it would take you to pay off a purchase based on your spending plan and the interest rate on your card. The benefits and drawbacks of credit cards are discussed below.
Pros of credit cards
Debit cards provide the following advantages:
- They provide loans for a limited time. As you don’t always pay for the things you buy with a credit card, credit cards provide temporary financing. This is advantageous when you need to pay for an urgent purchase or want to pay it off gradually. Be mindful of the interest you’ll accrue if you don’t settle your debt in full each month, though. Learn about additional financing choices, such as the differences between a personal loan and a personal line of credit.
- They might create a credit history for you. You may build a credit history and raise your credit score by making on-time credit card payments. When applying for a mortgage or vehicle loan, your credit score is a crucial consideration. A high credit score can also help you get a lower interest rate. Debit cards don’t impact your credit score, which is a significant distinction between them and credit cards.
- They could provide incentives or cashback schemes. One of the main benefits of credit cards is this. For specific expenditures, such as those involving travel, fuel, or entertainment, some credit cards provide more cashback incentives.
- They provide stronger fraud defense. According to the Federal Trade Commission, the Fair Credit Billing Act limits your responsibility for any fraudulent payments made to your credit card to $50. The fact that credit card purchases don’t instantly remove money from your checking account may provide further fraud protection.
Cons of credit cards
Debit cards provide the following advantages:
- Spending more than you can afford is a risk. The predetermined credit card limit may exceed what your budget will allow.
- It could be simple for your spending to spiral out of hand when you have the choice of carrying a load on your credit card each month. Your credit card debt may become unmanageable if this continues for an extended period of time.
- When you have a balance, you must pay interest. If you don’t pay off the entire sum on your credit card each month, interest will be charged. Paying down your principal sum may become increasingly challenging as your interest obligation grows.
- Fees for late payments may accumulate. The fine for failing to make a credit card payment might be pricey. Making this a habit might hurt your budget and credit score.
- They could lower your credit rating. Credit cards may both improve and harm your credit rating depending on how they are used. It’s crucial to make payments on schedule and to confirm that you can afford the bare minimum payment each month. If not, your credit rating can decline.
Debit vs. credit cards: when to use each
| Debit cards | Credit cards | |
| Pros | Convenient and widely accepted | Short-term financing option |
| No annual fees | Can build your credit history | |
| Can help with budgeting | May offer cashback rewards | |
| Interest-free | Strong fraud protection | |
| Cons | Limited fraud protection | Danger of overspending |
| Spending limit depends on checking account balance | Interest payments | |
| Possible overdraft fees | Late payment fees | |
| Don’t build your credit | Can hurt your credit score |
It might be challenging to know when to use credit or debit cards. You can decide which choice is most appropriate for a given situation by weighing the advantages and disadvantages of credit and debit cards.
When to use debit cards
For regular expenditures like lunch at the office or groceries on your way home from work, debit cards are perfect.
You can simply keep track of your spending with these little purchases and make sure you have enough cash in your checking account to cover the transactions. Debit cards may also be a good approach to developing sound spending habits because you can never spend more than you have.
You could be better off using a debit card than a credit card if knowing that you can carry a debt on a credit card makes you more prone to overspending.
When there are no ATMs nearby, debit cards are a practical method to withdraw money from your account or receive cash back during a purchase.
When to use credit cards
Debit cards don’t impact your credit score, which is a significant distinction between them and credit cards. Credit cards may help you establish credit if used wisely.
They’re a fantastic choice if you have faith in your ability to manage your finances and always pay your bills on time.
Also, they provide robust fraud protection, which is particularly helpful when shopping online.
On the other side, inefficient credit card use is undesirable. Although you can use credit cards to fund significant costs that you wish to pay off over time, it’s important to avoid developing credit card bill-carrying behavior.
In order to prevent incurring additional interest and fees, it is important to pay off your credit card debt in whole and on time each month.
