Which is Best? Debit vs Credit Cards

When you’re swiping with a card to pay for something, is it a debit or a credit card? Many people don’t understand the differences between these two cards and they may be using the wrong one for their purposes. In this article, we take a closer look at both in more detail to help you make more informed decisions.

How Does a Debit Card Work?

At first glance, a debit card looks like a credit card, but it works differently. A debit card is linked to a checking account, it’s issued to you by your bank. When you swipe a debit card, the amount is deducted almost immediately from your checking account. This will appear on a statement in a day or so and in certain circumstances it could appear as a hold on the account. This means that the account balance looks the same, but in reality you have access to a lower available balance to account for the difference. This is a safety feature to prevent users from withdrawing funds until that transaction has been applied to the checking account. No card is perfect, there is one pro and one con to consider before you apply for a debit card: 

Pro:

Avoiding Debt: A debit card can only be used to draw on funds that the user already has in their checking account. There is no danger that the user can rack up debt, if the amount is too high the transaction is simply canceled. This can be a useful feature for people that tend to overspend, they can avoid high-interest debt and stick to a budget.

Con:

Fraud Protection: Although the situation has improved in recent years, debit cards offered less protection from fraud than credit cards. Certain debit cards issued by Visa, Mastercard and other payment processors have similar protections to credit cards.

How Does a Credit Card Work?

A credit card operates on a separate account, when it’s used the transaction is logged on your credit card account. Each month there is a specific billing day, this is when the transactions that you’ve made are collated into a statement and sent to you. All charges made during the month are listed in order along with any outstanding balance from the previous month. There will be a minimum payment that you need to make by the due date. If the full account balance is not cleared every month, you will incur interest charges. The calculation is the amount outstanding and the interest rate. The minimum payment only covers a fraction of the outstanding balance and the interest fees. So, if you only pay the minimum amount it could take years to clear the balance and this is exacerbated if you continue to use the credit card. There are two main pros and one cons to consider before you sign up for a credit card:

Pros:

Building Credit History: When you use a credit card this is reflected on your credit report. When payments are made on time and credit utilization is low, the history is positive. But, this is a double edged sword, if there are delinquencies or late payments this can go against you. Credit reports are used to calculate credit scores which are useful for mortgages and loans. If a user is responsible they can raise their credit score by paying on-time and maintaining a card balance that’s low in comparison to their card limits. Purchase and Warranty Protections: Certain credit cards offer extra insurance and warranties on purchased items that exceed those offered by the brand or retailer. If the item fails after the manufacturer’s warrant has expired, it may be covered by the credit card! Some credit cards have price and purchase protection built-in to replace items that may become lost or stolen. Any price differences may be refunded if the items can be found elsewhere at a lower price. 

Con:

Debt: It’s all too easy to get into financial trouble with reckless credit card use. Paying off the minimum amount can lead to hundreds or thousands of dollars in interest payments. Credit card users should try their best to clear the balance every month to avoid paying interest and gain all the benefits of credit cards at the same time.

Which is the Best Card?

There is no easy answer to this question, every person will have their own preferences and financial situation to consider. If you make a larger purchase it’s easier to spread the cost with a credit card if you don’t want to take on a loan. The purchase can be paid down with each statement, but the interest payments can be a problem. The best credit card to use will have a zero or low introductory APR to minimize the interest charges. A credit card can also be useful if you have a financial emergency that requires an immediate solution. A user can spend money quickly and they won’t need to wait for their paycheck to hit their checking account to deal with the situation. There will be a brief interlude before the credit card statement arrives to make a later payment. A credit card can also offer cash back or other rewards on purchases. This can be a nice bonus if you’re paying off the balance in full every time the credit card statement arrives. For those that don’t have a great credit score and don’t want to risk getting into debt, a debit card is a much better option. Because the debit card is tied to the checking account balance it cannot be used to rack up debt with reckless spending. Although it is true that most debit cards don’t have a rewards program there may be certain perks after a set number of transactions. Many debit cards also have a round-up feature to transfer small amounts of money to a linked savings account. This is an easy way to save and this is not possible with a credit card at this time.