Credit Card vs Debit Card: Which Should You Use?
When you make a purchase, your payment options go beyond paper or plastic. While debit cards and credit cards may look similar, their functions are quite different. Below, we will break down the differences between the two, and most importantly, when it is best to use each one.
What’s the Difference Between Debit & Credit?
When you pay with a debit card, you are authorizing the money to immediately be taken directly out of your bank account. If you do not have enough money in your account, you bank will most likely charge you a steep overdraft fee.
When you pay with a credit card, the transaction is processed by the credit card company. In other words, you “borrow” this line of credit, which you can pay back at a later time.
You Should Use Your Credit Card If:
You are trying to raise your credit score
Contrary to popular belief, cutting up your credit cards will NOT improve your credit score. In order to build credit, you must use it. That being said, it’s important to keep the balance low (or completely paid off if possible) in order to reflect responsible credit usage to the reporting bureaus. This is especially useful if you are trying to repair your credit after filing bankruptcy.
You are buying something online
Internet purchases offer convenience, but they can also carry a higher risk of identity theft. If your credit card information is stolen, you will have a much easier time eliminating any unauthorized charges than you would if your debit card information is stolen. This is because your credit card company usually offers protection against these incidents, and because the money has not yet been transferred in some cases.
You are Traveling
Similar to shopping online, your credit card will provide extra protection against unauthorized use if your card is lost or stolen, or your information is compromised by a false card reader or ATM.
You are Making a Large Purchase
Did you know that your credit card company may offer additional warranty protection on large purchases? Different cards vary in policy, but if you are buying a large item, or an electronic item, it might be a good idea to put it on your credit card.
You Have a Rewards Program
Credit card rewards can be a great perk – if used correctly. While you shouldn’t make purchases specifically for the points, it’s a good idea to use your credit card on everyday purchases that you would normally use cash or debit for.
You Should Use Your Debit Card If:
Funds Need to be Transferred Immediately
If you are paying someone who needs access to the money right away, your debit card is the way to go. Credit cards can sometimes take up to three days before the charge posts to your account.
You Need Extra Help Budgeting
One of the drawbacks to using credit cards is that it is harder to track your finances in real time. For example, say you made several purchases on credit during the month, then check your bank account to see how much money you have available. The amount will look deceptively high if you have not yet paid your credit card bill, which can lead to overspending if you are not careful. For this reason, some people prefer to stick to debit in order to get an accurate picture of how much money is available.
You are Exchanging Foreign Currency
If you find yourself in a situation where you need actual cash in a foreign currency, it might be better to use your debit card through an ATM. Doing so allows you to piggyback on the banks “wholesale” exchange rate, rather than individual rates.
Hopefully these guidelines will give you a better idea of when to use credit or debit. If you are currently overwhelmed with credit card debt, it might be time to start over. For more information, contact DeLuca & Associates at (702) 252-4673 for a free consultation.
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