Debit Card vs. Credit Card

February 21, 2012 No Comments »
Debit Card vs. Credit Card

Credit cards aren’t for everyone. Some people simply aren’t responsible enough to carry credit cards. And others may not have the credit history necessary to obtain one. Then there are those that just like to use cash.

Of course, banks know this, which is one of the major reasons why they offer debit cards.

If you have a checking/savings account, you will be provided with a debit card to use for purchases and cash withdrawals at ATMs.

Put simply, debit cards were introduced to eliminate the need for checks, which explains why they also go by the name “check card.”

Sure, you’ll still see Grandma writing a check at the grocery checkout, but most others will be swiping, either with a debit card or a credit card.

So which is better? And which should you use? Well, let’s look at a description of each, along with the pros and cons, to answer that question.

Debit Cards

As noted, debit cards are issued by the bank in which you have a checking or savings account so you can tap into that money while on the go.

They look and feel just like a credit card, but deduct money directly from their associated accounts.

So if you make a purchase with a debit card, it will be withdrawn instantly.

For example, if you have a checking account with a $100 balance, a $75 debit card purchase will reduce your balance (and spending power) to $25.

From there, you’ll either need to stop spending with the debit card or replenish the account with more money.

That said, debit cards are not lines of credit. In short, what you have in the account is what you can spend.

This isn’t necessarily a bad thing, as you won’t be able to spend beyond your means. In fact, many would view that as a positive. But it is limiting if you need to borrow money short-term, which many of us do.

Additionally, because debit cards aren’t credit, they won’t add to your credit history in any positive way.

And without credit history, you won’t have a credit score. Sure, you can build credit history in other ways, but without credit cards, you’ll be missing a key credit-building component.

Advantages of Debit Cards

  • Anyone with a checking/savings account is automatically approved
  • Spend only what you actually have
  • Withdraw money without cash advances fees
  • Avoid finance charges on unpaid balances

Disadvantages of Debit Cards

  • Spending power limited to linked account balance
  • Does not build credit history
  • Possible over-the-limit fees and insufficient balance fees
  • Liability protection for fraud may be limited
  • Any fraud could compromise funds in associated accounts

[Debit card alternative: PerkStreet Financial review.]

Credit Cards

Okay, so we know a little bit more about debit cards now. But what about credit cards?

Well, credit cards look just like debit cards, in that they are plastic rectangles with a sequence of numbers across the front that can be used to make purchases and withdraw cash. But there are quite a few important distinctions.

First off, a credit card is a “line of credit,” meaning you are provided with spending power that you may not actually be able to pay back, at least not all at once.

This can be great if you need a little help during the “slow months,” or during periods where spending needs are great (think holidays) and cash on hand is low.

But this spending power can also get you into trouble if you aren’t responsible.

For example, you may apply for a credit card and wind up with a $10,000 credit limit, even if you only have $2,000 in your checking account.

The credit card issuer is basically taking a risk on you, after reviewing your credit history. Sure, you may not be able to pay back your credit card purchases all at once, but that’s not a bad thing (for them).

The issuer will charge you a hefty amount of interest on any balance carried, so it’s a win for them, even if it takes you years to pay off the debt.

Of course, credit cards don’t always equate to huge piles of debt. Many credit card users pay off their debt in full each month without paying a penny in interest.

At the same time, these responsible credit card users earn rewards for spending with their credit cards, and build positive credit history, which leads to a good credit score.

Advantages of Credit Cards

  • Increased purchasing power
  • Ability to earn rewards such as cash back
  • Zero fraud liability for unauthorized purchases
  • Build positive credit history
  • Benefits like travel and car rental insurance

Disadvantages of Credit Cards

  • Can spend beyond your means
  • Balances not paid off in full are subject to finance charges
  • Not everyone will be approved
  • Missed payments can lead to a lower credit score
  • May have a tendency to spend more
  • Not all merchants accept credit cards

So there you have it. There are pros and cons to both credit cards and debit cards. And when it comes down to it, you’ll most likely carry both in your purse or wallet.

Debit cards will be used to withdraw cash and to make purchases where credit cards aren’t accepted.

Credit cards will be used to make all other purchases, assuming you want to earn rewards. Or if you simply need a little spending boost.

And as credit cards become more and more popular, you probably won’t be able to go without one.

For those who are completely down on credit cards, it should be noted that it’s extremely difficult to build credit without a credit card.

And if you don’t have a solid credit score, you’ll be hard pressed to obtain important financing, such as auto loans and mortgages, both of which most of the population rely on.

Read more: Living without a credit card is a bad idea.

(photo: eckes/bernd)

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