Pros and Cons of having Debit Card and Credit Card
Debit vs. credit: The basics
A lot of people stick with a debit card as a way to control their spending and avoid racking up big credit card debt because you can’t spend what you don’t have with a debit card. In the aftermath of the Great Recession, this strategy became a very popular one as many people were forced to rethink their spending routine.
But debit cards are full of hidden dangers — and what’s confusing is that these dangers are often the same features that make them an appealing alternative to credit cards.
- Credit card – Think of a credit card as a line of credit issued by a lender, allowing you to take on debt. Once you accumulate that debt, a credit card allows you to pay it off all at once or over an extended period of time.
- Debit card – A debit card IS NOT a credit card, even though they look just the same. In fact, when you use your debit card, it’s exactly like writing a personal check. Most merchants accept debit cards, and they will ask you to enter a Personal Identification Number (or “PIN”), known only by you and your bank, so that the money can be taken directly out of your checking account.
- A debit card is linked to your checking account.
- Any time you make a purchase, the money comes directly out of your account.
- Because the card is linked to your checking account, you can only spend whatever money you have in your account.
- When you swipe a credit card, you’re spending someone else’s money — money the bank or credit card company has given you access to.
- And that money isn’t free — when the bank agreed to lend you the money, you agreed to pay a fee for it in the form of interest.
- So if you charge a bunch of stuff on a credit card and pay the bill in full before it’s due, you don’t pay any interest — because that would mean the bank got all of its money back.
- When you don’t pay the bill in full, meaning you start the next month with a balance on the card, you will be charged interest, which is added to the total balance.
Also Read : Protect Your Credit Card
Pros and Cons Of Debit Card
Now that you have a basic understanding of how debit and credit cards work, it’s important to know the pros and cons of each.
But just a heads up, even though certain features are considered pros, there may be cons that cancel them out.
Pros of Debit Cards
- A debit card is linked to your bank account, so you can only spend what you have. This is what makes debit cards appealing for a lot of people, since that restriction can help you control your spending.
- You can get cash with a debit card — so if you need actual paper money, you can use your debit card at an ATM or to get cash back at a store.
- And with debit cards, you don’t pay interest on the money you spend — since it’s your money.
- You can use it pretty much anywhere.
- Since the money comes right out of your account, you know how much you have left for the month.
- buy now, pay now — when you spend money it’s directly taken out of your bank account. Credit cards can give you the illusion of having more money than you actually have, since it isn’t taken out of your bank account.
- no interest rates
- ATM access
Cons of Debit Card
This is where you’ll see how some of the pros of debit cards can easily become cons if you aren’t careful.
- Debit cards can actually be riskier than carrying cash. It’s not great if someone steals your cash, but since your debit card is linked to your bank account, if someone steals your card, they could get access to every cent in your bank account.
- Because you can only spend what’s in your account, that really limits your overall spending ability.
- Fees: Although there typically aren’t fees associated with a checking account (besides overdraft fees), there are several fees you could face with a debit card depending on how you use it. (If you are paying an annual fee for your checking account, it’s time to shop for a new one!) Here are some common fees people face with debit cards:
- Foreign transaction fees: Many banks charge you a fee when you use your debit card to make a purchase or withdraw money abroad.
- ATM fees: Many banks also charge you a fee to withdraw money from an ATM that’s not affiliated with your bank.
- Overdraft: If you overdraw your account, you’ll be charged a fee.
- Keep in mind that specific fees will vary depending on your bank and your card.
- Another downside to debit cards is that they don’t help you build credit, like credit cards do — and building a good credit history of on-time payments is important for your overall credit and credit score — especially when it comes time to get a big loan for something like a car or house.
- If you report the card as lost or stolen within two business days, you won’t be responsible for more than $50 of unauthorized transactions.
- If someone uses your physical ATM or debit card without your permission (meaning it was stolen) and you report the fraudulent charges within 60 days after your statement is mailed to you, you could lose as much as, but no more than, $500.
- If someone uses your card number to make a fraudulent charge, but your card or PIN has not been lost or stolen, under federal law you will not be liable for the transaction if you report it within 60 days after your account statement is sent to you.
- If someone uses your ATM or debit card without your permission and you don’t report it within 60 days after your statement is mailed to you, the potential damage is unlimited. You could lose all the money in that account, the unused portion of your maximum line of credit established for overdrafts, and even more.
- no protection if it’s stolen. If your debit card number is stolen and someone drains your bank account, you probably won’t see that money ever again.
- could possibly overdraft your bank account, and overdraft fees
- limited to the money in your bank account — if something happens and you don’t have enough money to cover it, you’re out of luck.
Pros and Cons Of Credit Card
Pros of Credit Card
- You can use a credit card pretty much anywhere.
- A credit card can give you immediate access to money you may not have in your checking account, like if you need to cover something you can pay back with your next paycheck. Just make sure you can pay it back before the bill is due.
- Using a credit card for emergencies is not ideal (which is why you need emergency savings), but it can be a last resort if you’re really in a bind,
- On the same note, a credit card also gives you flexibility. You shouldn’t go crazy, but as long as you can pay off the balance in full before the due date, you won’t be charged any interest, and that can give you some flexibility throughout the month and between paychecks.
- One of the biggest benefits of a credit card is that it can help you build credit — as long as you use it responsibly.
- If you pay your bills in full and on time each month, those on-time payments help improve your credit score, which can get you lower interest rates down the road on things like a car loan or mortgage.
- Basically, making on-time payments gets lenders to trust you more — so you always want to pay the bill in full and on time each month.
- Credit cards also come with rewards, which vary based on the card. Some examples are cash back, airline miles, discounts, additional insurance coverage and more. There are tons of different rewards programs out there. Some even offer additional warranties or insurance coverage on certain purchases, like cell phones.
- One of the best features of credit cards is the protections they offer, which are much better than those offered on debit cards.
- If your credit card number is stolen, but not the physical card, “you are not responsible for unauthorized charges under federal law,” according to the Consumer Financial Protection Bureau.
- If the actual card is stolen, you are liable for no more than $50 in authorized charges — as long as you report it to your card issuer. Some issuers won’t even charge you the $50.
- Also, when someone makes fraudulent charges on your credit card, no money actually leaves your hands. So while you get it straightened out, you aren’t stuck with a huge chunk of your cash missing – like you are when debit card fraud occurs.
- a lot of credit cards now offer cash-rewards, travel points or sign-up bonuses. This is basically free money if you’re responsible enough to pay it off. My dad has the Disney rewards Visa and uses that for EVERY purchase, which funds an annual Disney trip for our family of five. I personally have the Amazon credit card (which has super high interest), but I pay it off and get to benefit from the 5% cash-back rewards in Amazon credit, which I frequently use to pay for entire purchases.
- buy now, pay later — if you’re short on cash in an emergency, you can use a credit to pay for whatever it is
- you have more protection with a credit card than a debit card — it’s much easier to cancel your credit card and get a new one than it is to have to freeze your bank account because your debit card number got stolen
- some credit cards offer 0% APR introductory rates, which can help you with major purchases. For example, I recently purchased a new laptop through Best Buy and opened a Best Buy credit card which offers 0% interest rates for 12 months. I will have the laptop paid off within that time frame. You do have to be careful with these — if you don’t pay off the balance in full you could end up with interest charges for the FULL purchase price, not just what’s left for you to pay off.
- It’s important to build your credit score and maintain good credit so you can purchase a vehicle, home, get an apartment, etc.
Cons of Credit Card
- If you have a hard time controlling your spending, a credit card can get you into big trouble fast.
- If you don’t pay off the balance in full each month before the due date, that’s when people start to fall behind — because when you carry a balance on the card from one month to the next, the interest charges kick in and that money is added to your overall balance.
- When you’re only paying the required minimum each month, interest charges continues to add up — increasing the total balance even more — because keep in mind, when you only pay the required minimum payment, you still get charged interest. So as interest increases the balance each month, those minimum payments aren’t really even making a dent in getting that total amount paid off. It’ll take you longer to pay off the card and cost you more money over time — making the items you charged on the card a lot more expensive than what you paid for them. That’s when credit card debt can quickly spiral out of control.
- Fees: Many credit cards come with some type of fee, or fees, so when you’re choosing a card, make sure to look for one with the fewest to no fees.
- Interest rates — duh. If you don’t pay off your balances, you could be hit with high interest rates.
- You could spend more than you can afford without realizing it. It’s much easier to realize the damage you’re doing if you’re watching your bank account drain, not so much if you’re racking up a credit card you rarely check the balance of.
The best way to take advantage of the benefits of a credit card is to charge only what you know you can pay off at the end of the month. If you’re just starting out and trying to get control of your spending and saving, a credit card can be dangerous — so just be honest with yourself about what you can realistically handle.
Debit Card vs Credit Card: Credit Card Wins
At some point you will deal with fraud either due to hackers, skimmers, a stolen wallet or a dishonest store clerk. When this day comes, it’s best the information stolen doesn’t link directly to your bank account.
Also Read : Protect Your Credit Card