Credit Cards Are Better Than Debit Cards If You Are Responsible

Debit cards are linked directly to your bank account - typically a checking account. When you make a purchase with a debit card, the money is withdrawn from your bank account. For example, say that you go to Starbucks and buy a cup of coffee for $10.

If you use a debit card for this purchase, the $10 will come out of your bank account. Think of debit cards as a piece of plastic that acts like cash. Credit cards on the other hand are not linked to your bank account. Instead, you get a line of credit up to a set limit.

When you purchase something with a credit card, the card issuer loans you the money for that purchase. For example, if you were to buy a $10 cup of coffee from Starbucks with a credit card, that money does not automatically come out of your bank account.

The credit card issuer will give Starbucks $10 on your behalf. It is your job to repay the credit card issuer for this temporary loan. If you pay your credit card balance off each month, you won't be charged any interest. If you fail to pay off your credit card balance, you will be charged interest and it is usually quite high.

Safer than debit cards

Credit cards are often safer to use than debit cards as they have better fraud protection. The most you will ever be liable for if there is fraudulent activity on your credit card is $50. If your card or identity is stolen and misused, the credit card issuer will not hold you accountable for unauthorized purchases.

Rewards

Credit card issuers incentivize you to use your card by offering rewards. These rewards often come in the form of cash back, miles, and points. You can use your credit card rewards for cash, gift cards, flights, hotels, and more depending on the specified rewards of the specific credit card you are using.

Build Your Credit Score

Your credit score is a number that is assigned to you based upon the use of your credit card. Each month, your credit card issuer will send your credit card spending and activity information over to a credit bureau. Your credit score is important because it will determine the rates that lenders will give you when you need a loan.

The better your credit score, the better your rates tend to be. Your credit score will go up when you use your credit card responsibly. Lenders may look at different credit scoring methods to determine your credit score, but a common one is the FICO credit score.

Access to Capital

If you use your credit card responsibly, your credit score will go up. When you have a higher credit score, you are able to access capital. For example, if you have a credit score between 744 and 799, your credit is viewed by lenders as very good.

Say that you were looking to buy a new car and decided it made more sense to finance the car as opposed to paying cash. Since your credit score is very good, you would likely have no problem obtaining financing. On the flipside, if your credit score was in the range of 580 to 669, it would be harder or more costly to finance.  

The point here is that the use of a credit card creates cascading effects in other areas of your life. If you use your credit card responsibly, you can get access to better rates when you need to access capital such as a car loan.

Risk of Credit Card Debt

The biggest risk of using a credit card is the risk that you will rack up credit card debt. Credit card debt occurs when you fail to pay off your balance by the end of the month. Since credit cards are not connected to your bank account, every purchase you make with the card is a temporary loan from the card issuer.

If you fail to pay back the card issuer on time, the issuer is going to charge you interest until the balance is paid off. The interest rates on credit cards can easily be over 20%, so it is important that you use your credit card responsibly by paying off the balance each month.

Eliminate the risk of credit card debt

When you use a debit card, you immediately eliminate the risk of racking up credit card debt. The reason for this is that debit cards are connected to your bank account. You can't spend more money on your debit card than what is in your account unless you overdraft it.

For example, say you wanted a new TV that was ging to cost $500, but only had $300 in your bank account. If you used a credit card, you risk going into debt as you don't actually have the money. If you use a debit card, purchasing the TV is not an option at this point as you don't have enough money in your accunt.

Helps manage your spending

Debit cards will help you manage your spending as the card is linked to your bank account. If your bank account only has limited funds, you are only able to spend what you have when you use a debit card. If you have a credit card, you can spend the money even if you don't have it.

Debit cards are easy to get

Once you open a checking account, you can ask your bank for a debit card. There is no credit check and almost anyone can get a debit card with a valid bank account which makes them more accessible than credit cards.  

Does not build credit

Unlike credit cards, debit cards do not build credit. There are new types of debit cards coming out that do report your spending to credit bureaus, but for the most part a standard debit card won't help you build your credit score.

Some individuals argue that you should always use cash for all of your purchases, so having a credit score is not a necessity. However, the reality is that at some point in your life you will need to borrow money. After all, do you have $400,000 laying around to buy a house?

When you only use debit cards, you eliminate the potential to build credit. Since your credit score is used to evaluate your reliability as a borrower, you may find yourself struggling to obtain financing when you need it if you only use debit cards.

May create cash flow problems

If you have a large bill to pay and only have a debit card, it can create cash flow problems. For example, say that your fridge broke and you needed a new one that was going to cost $500. If you only had $300 in your bank account, using a debit card would not be a viable option as you don't have enough money.

You might have to wait a few weeks until your next paycheck to be able to afford the fridge, which is a necessity. If you had a credit card, you could buy the fridge immediately and then pay off the balance in full when you got your next paycheck.

Forget the rewards, miles and points that credit cards offer. They are a nice perk, but they are not the primary reason you should use a credit card. You should use a credit card for two reasons. First, credit cards are safer than debit cards.

Since credit cards work using a revolving line of credit, you don't have your money leave your account at the time of a purchase. Instead, it is the card issuer that is funding that purchase for you. It is your job to then pay them back.

Due to this, the card issuer takes on almost all of the liability as it relates to things like fraud. If something gets ahold of your credit card or steals your identity, your maximum liability will only ever be $50. If you use a debit card, your liability can be much higher depending on how long it takes you to report fraudulent activity.

The second and most important reason that you should use a credit card is that it builds your credit score. Your credit score is going to be a vital component to accessing capital when you need it. When you need to borrow money for things like a mortgage or car payment, a credit score is going to make the process so much easier.

You may have heard some individuals say that credit cards should never be used due to the possibility of going into debt. If your fundamental financial belief is to not borrow money at any cost, you will likely not use a credit card at all.

While it is true that credit cards have a debt risk associated with them, borrowing money is not a bad financial decision if you do it the right way. Some people say that banks and credit unions are out to screw you with the interest that they charge you.

While this can be true in some circumstances, banks like to lend borrowers money who are responsible. When you use your credit card responsibly, the banks will happily give you a loan with the best terms they can offer at that time as your high credit score indicates you will repay them.

Using a credit card can be part of a well rounded financial plan if you are responsible. You will build your credit, which will give you more access to capital than individuals with poor credit. As an added bonus, you do get points, cash back, and other rewards when you use your credit card responsibly.

You should use a debit card if you have a history of irresponsibly using credit cards, or are worried you will use them irresponsibly. Even though we think credit cards are great, the reality is that many people should not have one.

If you currently have a credit card or used one in the past and it got you into credit card debt, it is best to pay off the balance and cut up the card. Don't kid yourself that you will turn your financial life around at the drop of a hat and start using credit cards responsibly when you have shown that you can't handle one.

This is not to bash you if you are in this scenario. Instead, it is to help you. If you are not a credit card person, that is fine. Simply use a debit card. Debit cards do not offer the rewards of credit cards (although a few offer some rewards) and won't build your credit.

However, since a debit card is connected to your bank account, it can help you manage your spending. Debit cards are easy to get as long as you have a checking account and ultimately they will eliminate the possibility of racking up unwanted credit card debt.

If you find yourself in a situation in which you can't decide between credit cards and debit cards, you can always choose to use both. You might be hesitant to use a credit card as you are not sure if you can manage it responsibly. That is a fair concern.

Here is what to do. Apply for a beginner friendly credit card and put small fixed expenses on that card. This can include your Netflix and Spotify subscriptions, car insurance, and renters insurance for example. If you only put a few expenses on your credit card, it is likely you will be able to pay off the balance in full each month.

As you do this, your credit score will go up over time if you continue to do this strategy. This will allow you to access capital at more favorable rates than if you had poor credit. For the rest of your expenses, you should use a debit card.

Doing so will help you avoid the risk of going into credit card debt and will help you manage your spending. If you use a debit card, you have to be aware of how much you are spending on the card as it is basically cash. This can help you stick to your monthly budget.

The bottom line is that debit cards connect directly to your bank account. When you make a purchase on a debit card, the funds are taken out of your checking account. Credit cards on the other hand work using a line of credit.

When you make a purchase using a credit card, your card issuer loans the money to you for that purchase, and it is your job to pay off your balance in full each month. Credit cards are safer than debit cards, offer rewards, help you build credit, and help you get access to capital.

However, they can also cause you to go into debt at high interest rates if you are not careful. Debit cards eliminate the risk of credit card debt, can help you manage your spending, and are easy to get. However, they do not help you build credit and can create cash flow problems.

If you can use credit cards responsibly, it is better to use a credit card over a debit card. Having a good credit score is important so that you can access capital. With that being said, credit cards are not for everyone. If you have a history of credit card debt, it is best to stay away.

As stated previously, you do not have to pick one over the other. You can have both a credit card and a debit card. This strategy will work well for some people as it can reduce the risk of going into credit card debt, while still building credit.