Convenience is everything in today’s fast-paced world, and credit and debit cards are a big part of that convenience. Deciding between using a credit card or debit card is more than just a pay now or pay later scenario. This decision can impact your credit score, your credit report, and even your identity—for years to come.
There’s no clear-cut rule for choosing which way to pay, but there are a few factors you may want to consider when reaching for your wallet.
When you use and pay down a credit card, you’re helping build your credit file. And unlike a debit card, a credit card is not linked directly to your bank account, which means you’re lessening the risk of someone getting access to and draining your funds.
When using most credit cards, money is not taken immediately out of your account. That money is due by the end of the billing cycle, which ranges from 25 to 45 days. You will be billed for all unpaid charges plus interest. Because purchases aren’t automatically deducted, you may have a better chance of contesting any fraudulent charges that may be made to your credit card account.
If you are concerned with establishing credit, you may want to consider a secured credit card (one where you post a security deposit with the issuing bank, usually at least equal to your credit line). The National Foundation for Credit Counseling offers some other good ideas on how to establish credit.
Another perk to credit cards is the rewards they offer. More often than not, credit cards offer better rewards than debit cards, and some can be used to buy products or pay back some of your credit card balance. Be careful, though—in some cases, these rewards may lead you to spend more than you really can afford.
It’s also easy to get carried away with credit cards. Using credit cards makes some people feel like they are not spending any money, which can lead to overspending. Do not focus on rewards or rely on the convenience of credit cards if these perks are causing you to overspend.
If you can’t stand the thought of paying interest, debit cards are a good option to consider because the money is taken directly out of your bank account. In addition to avoiding interest, you can also avoid hefty charges associated with late payments.
And unlike having many credit cards, which can potentially negatively impact your credit score, having many debit cards will not hurt your score. With that said, debit cards will not help you build your credit, either—a factor to consider when deciding which form of payment to use.
While carrying a debit card is safer than walking around with a pocket full of cash, you still run the risk of fraudulent use, either in the form of ATM withdrawals or purchases. Those activities will affect your account immediately, and you can easily remain unaware long enough to experience a significant loss. This is especially true in the case of identity theft, where thieves use your stolen information to access your accounts and, sometimes, create new ones.
Most debit cards do provide a little protection from fraud, but the coverage depends upon which bank you use, in which state you live, and how quickly you report the loss of the card, among other things. There are some banks that offer a zero liability policy for fraudulent use, but there is often a yearly fee for this benefit, and sometimes there are stipulations of which you need to be aware. Be sure to check with your bank to discuss how it handles identity theft and fraud issues.
Also note that if you overdraw your debit account—you make a purchase with a zero balance in the account—you can be hit with substantial fees. That is extremely important to remember if you have automatic payments deducted from your account or you are not keeping track of your spending. To prevent overspending, you may want to record each of your debit card transactions just as you would a payment using a check.
When making your choice, keep in mind that debit and credit cards are tools that, if not used responsibly, can easily damage your financial health. Be thoughtful and choose your method of payment wisely.
Steve Repak, CFP®, is a professional speaker and the author of Dollars & Uncommon Sense: Basic Training for Your Money.
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