When it comes to daily purchases, many people wonder whether it makes sense to use their debit card or credit card to make those purchases.
Both options have advantages and disadvantages, depending on your financial situation, spending habits, and goals.
What Is a Debit Card?
A debit card is linked directly to your checking account. When you make a purchase using your debit card, the money is immediately deducted from the available balance in your checking account. Using a debit card is the same as using cash-in-hand to make purchases.
For example, assume you visit an automated teller machine (ATM) and withdraw $50 in cash. Your available balance was $1,500 and is now $1,450 after the withdrawal. Next, you go to the supermarket to purchase groceries. You spend $35 of the cash on groceries, so you still have $15 cash remaining. The total funds available to you are now $1,465 ($1,450 in the bank + $15 cash-in-hand).
Alternatively, assume you don’t visit the ATM to withdraw the cash but go directly to the supermarket. You use your debit card at the register to purchase the same $35 of groceries. The available balance in your bank account is now $1,465 ($1,500 available minus $35).
Notice how both approaches result in the same dollar amount of grocery expense and available cash after the transaction.
What Is a Credit Card?
A credit card allows you to borrow money up to a certain credit limit to make purchases. Think of it as a short-term line of credit. At the end of each month, you’ll receive a statement showing all of your monthly charges, any interest expense, your total balance due, your minimum payment due, and the payment due date.
For example, assume you have $1,500 in your checking account and a new credit card with a $1,000 credit limit and a zero current balance. You purchase groceries at the supermarket and spend $35 using your credit card. After the transaction, your checking account balance remains at $1,500 because you spent zero cash, and your credit card balance increases by $35 for the grocery bill. You do not have to spend your cash until the end of the month when you get your credit card bill and a payment due date. As a result, you are getting a short-term loan from a credit card company to purchase groceries.
Benefits of Using a Debit Card
There are many benefits to using a debit card versus a credit card or cash-in-hand on your person.
Staying Debt Free: Since you’re spending money you already have, using a debit card can help you avoid accumulating debt. A credit card incurs debt and interest expense if you don’t pay your balance in full at the end of each billing cycle. By using a debit card, you can’t spend more than your available balance in your account.
No Interest Charges: Unlike credit cards, debit cards do not accrue interest expense because you are not borrowing money to fund purchases. A credit card interest rate is generally among the highest rates across any financial product. Over time, you can save a fortune by not using credit cards and carrying a monthly balance.
Widely Accepted: Debit cards are generally accepted almost everywhere that also accepts credit cards. When using your debit card, you must often enter your PIN code to complete the transaction. In contrast, when using a credit card, you either swipe the card’s magnetic strip using the credit card machine or use contactless to complete the transaction.
Drawbacks of Using a Debit Card
There are several drawbacks to using a debit card instead of a credit card.
Less Fraud Protection: If your debit card is compromised, the money is taken directly from your bank account. Once you report the fraud to the bank, the bank freezes the account and begins its investigation. Unfortunately, many banks will not immediately credit your account for the lost funds, so you may be waiting a while before you get your money back.
In contrast, if your credit card is compromised, the stolen funds increase your credit card balance, but there is no cash removed from your checking account. Once you report the fraud to the credit card company, they immediately reverse the fraudulent charges, reducing your credit card balance back to what you actually owe. The credit card company cancels your card and sends you a new card and number. By using the credit card, you are made whole almost immediately.
No Credit Building: Using a debit card does not impact your credit or your credit score. There is no credit score impact because you use cash, not borrowed funds. While this can be a benefit for avoiding debt and costly interest expense, it also means you miss out on the opportunity to build credit and increase your credit score.
Limited Rewards and Other Perks: Some debit cards offer rewards and other perks, but most do not. Furthermore, even debit cards with rewards programs are generally not as lucrative and beneficial as rewards programs with credit cards.
Benefits of Using a Credit Card
Builds Credit: Responsible credit card use can help you create a strong credit score, which is essential if you want to apply for a car loan, home mortgage, small business loan, or other form of financing. In order to maintain and build good credit, you must make on-time payments, pay at least the minimum amount due, and maintain low credit utilization. Following these three principles, your credit score should gradually increase over time.
Grace Period for Payments: With a credit card, you don’t have to pay for your purchases immediately. If you pay your credit card statement balance in full by the due date for each month, you can effectively get an interest-free loan for the period between your purchase and the bill’s due date.
Drawbacks of Using a Credit Card
Risk of Debt: The risk of accumulating debt is the most troubling drawback of credit cards. If you don’t pay off your balance in full each month, you’ll accrue interest on your purchases. The interest rates on credit cards can be incredibly high because credit cards are short-term, unsecured loans.
Negative Credit Score Impact: Responsible credit card usage can increase your credit score; however, missed payments and high balances can cause your credit score to plummet.
Overspending: With access to more funds than you have in your bank account, it’s easy to overspend with a credit card. This can lead to financial strain if you don’t have a solid repayment plan.
Many think spending more on credit cards will be okay because they will “just make more money” in the future, which is a risky financial mindset.
So What’s the Verdict?
Unfortunately, there is no easy answer. It depends on your financial situation, spending habits, credit score, available credit, and long-term goals.
Debit cards are great for people who want to stick with a budget and are terrified of accumulating debt. They are also great for individuals who need better discipline concerning their spending habits and could find themselves losing control with a credit card.
For many people, using both can offer a balanced approach. Use a debit card for everyday purchases and small expenditures while reserving your credit card for larger purchases where you can earn greater credit card rewards and have great fraud protection and security.