Debit cards versus credit cards: Two similar, yet very different payment methods. Proponents for each side offer their case.
Debit card proponents have stated that credit cards lead to dangerous spending habits and mountains of debt. Credit card proponents tout that when used responsibly, credit cards can build positive credit history, provide attractive travel and cashback rewards, and offer other benefits over debit cards, such as better fraud protection and improved credit scores.
So which side is correct?
The truth is, both may be right, as debit cards and credit cards each have advantages and disadvantages.
Today, we’ll discuss each card type in depth, in an effort to help you decide which card, or even a combination of both, is best for you.
Debit Cards Versus Credit Cards
Both debit cards and credit cards are manufactured plastic (or metal) cards with 16-digit-numbers, expiration dates, magnetic stripes, and EMV chips. They typically feature a logo of both the institution issuing the card and of the card service provider. You can use either a debit card or a credit card to make purchases in stores or online.
One main difference between a debit card and a credit card lies in where the money comes from that allows you to make purchases. Additionally, debit cards and credit cards come with different benefits and drawbacks that make the cards unique.
What Is a Debit Card?
Debit cards are directly linked to a checking account. When you use a debit card, the card pulls funds from your checking account using the money you’ve got on hand. You can also use your debit card to withdraw cash directly from your checking account via an ATM.
If you attempt to make a purchase with a debit card and don’t have enough funds in your account, your transaction may be declined by the bank or your checking account may go into overdraft.
What Is a Credit Card?
A credit card, on the other hand, is linked to a line of credit—also known as the card’s credit limit—up to a specific amount that the lender has approved you for. Credit limits may be increased or decreased at the discretion of the lender issuing the card, often depending on your payment history. Additionally, you may be able to borrow cash from your credit card by making a cash advance
When you make a purchase with a credit card, you will have to pay the lender back for the amount of the purchase. If you carry a balance on your credit card each month, you will also have to pay the lender interest on the amount of your balance.
Overdraft Protection Fees
Most financial institutions charge an overdraft protection fee for the service. This fee could be assessed at the end of the month or per use (only when you overdraw your account). At Lafayette Federal, we only charge you a nominal fee when you use the service. In other words, you don’t have to pay a fee simply for opting into overdraft protection.
Overdraft protection fees can range from $5 to as much as $38 per item. Some financial institutions may even charge interest on any balance outstanding, if you are linking your account to a line of credit (more on that later).
Advantages of Using a Debit Card
Debit cards are linked to your checking account, so you’re using money that you should already know you have when you make purchases. Because you’re not borrowing money when you use a debit card, you won’t have to pay any interest on transactions.
Additionally, it can be easier not to overspend when you use a debit card. Since the money is deducted from your account almost immediately, you typically know how your account balance changes whenever you use a debit card.
Also, it’s easy to withdraw cash with a debit card. If you’re using an ATM within your bank or credit union’s ATM network, you won’t have to worry about paying an ATM fee to withdraw cash using your debit card.
Most financial institutions do offer fraud and theft protection on debit card transactions—you usually have to report the fraud or theft as quickly as possible. If too much time passes, there may be nothing your financial institution can do, and you could be on the hook for theft or fraudulent purchases made with your debit card.
Disadvantages of Using a Debit Card
Although debit cards can help curb overspending, making purchases with a debit card doesn’t help you in establishing a good credit history, often needed to get approved for a mortgage loan, an auto loan, or even apply for a rental lease.
Additionally, debit cards often don’t offer any rewards, unlike most credit cards. Cashback and travel rewards can help you save money, so you may miss out on those opportunities if you only ever use a debit card.
And while debit cards may not have annual fees, you should be aware of other fees that can be associated with them. Monthly maintenance fees on checking accounts, overdraft fees, NSF fees, and out-of-network ATM fees can all be associated with using a debit card. Make sure you’re familiar with your financial institution’s fee policy so you can avoid these fees wherever possible.
Finally, fraudulent activity on your debit card can more complicated to deal with than a credit card. Even if your financial institution reimburses you for fraudulent transactions, you may have to go days or even weeks without access to the money in your checking account while the bank investigates the fraudulent activity.
Advantages of Using a Credit Card
Credit cards are popular because of the many benefits associated with them. Many credit cards offer some type of rewards program as an incentive to use them.
Cashback rewards allow you to receive a certain percentage of money back on purchases you make when you use the card. Oftentimes, you can earn larger percentages depending on where you use the card. Other credit cards offer travel rewards instead of cashback rewards. Travel rewards can help decrease or eliminate some travel expenses, including airfare, hotel stays, and more.
Additionally, using a credit card responsibly helps you build credit history. In fact, credit card use is one of the easiest ways to build or improve your credit history. By keeping your credit utilization limit low, making payments on time, and keeping your balance to a minimum on your card, you can show the credit bureaus just how responsible you are as a borrower.
Credit cards are also protected by more robust fraud and theft protection laws. If you report credit card fraud in a timely manner, you will only be held responsible for a maximum of $50 in fraudulent charges by law. And because your credit card isn’t attached to your checking account, you don’t risk losing access to your own money while the financial institution investigates the fraud.
Disadvantages of Using a Credit Card
As stated above, misusing or overusing credit cards can lead to debt. Since you’re not limited by the money you actually have in your bank account, it can become too easy to spend outside your means and rack up debt balances that become unmanageable.
To compound that, some credit cards have high interest rates and fees because they’re essentially short-term loans. Interest rates on credit cards can vary depending on the type of card, the credit history of the borrower, the rewards associated with that card, and more, but interest rates often range from 12% to 24% or higher. Some credit cards also come with an annual fee.
Carrying high debt balances, missing credit card payments, and applying for too many credit cards in a short period of time can negatively impact credit history. So while credit cards can help you improve your credit score, poor credit habits can ultimately damage your credit score as well.
Which is Right for You?
Choosing to use a debit card or a credit card (or a combination of both) depends on the purchases you’re making, your spending habits, and your financial goals.
If you know you struggle with overspending, it may be better to stick with debit cards until you develop healthier spending habits. (Creating a budget and tracking your spending is a great way to take control of your finances!)
But if you’re confident in your ability to live within your means, a credit card can help you make progress toward other financial goals. Using your credit card can help you build good credit history, while reaping benefits and rewards.
If you’re looking for a balance between the two, some consumers prefer to use debit cards for small, day-to-day transactions to ensure they don’t accidentally overspend. They may only use their credit cards for larger one-time purchases (that they’ve already saved up for) and pay off the balance before the first payment is due. This allows them to build credit history and earn rewards without the risk of losing track of their spending.
Lafayette Federal Offers Card Options to Meet Your Financial Needs
At Lafayette Federal Credit Union, we offer both debit and credit cards with great benefits. You can request a debit card with a checking account and enjoy access to an extensive network of surcharge-free ATMs all over the world.
You can also set up customizable alerts to be sent to you by text or email for different transaction types or dollar amounts, such as international purchases, declined transactions, and purchases over a selected amount.
Additionally, we offer credit cards with rates as low as 8.15%, credit limits up to $50,000, and no annual fee. You can earn reward points with every purchase you make and enjoy other great benefits such as free travel accident insurance any time you use the card to purchase plane tickets, train tickets, and other common carriers.