11/8/2013 8:15 PM ET|
Debit vs. credit: Which card should you use?
Using a credit card can have financial benefits and provide a level of consumer protection. But in some instances, debit is the wiser choice.
"Debit or credit?"
You hear it from every cashier, but as with most things, there's no one right answer. For some of us, in certain situations, credit might be better. For other people, in other situations, it might be debit.
So how are you supposed to know which option is right for you -- and when? We'll help you figure it out.
Use a credit card if …
No. 1: You're trying to build credit: The better your FICO credit score, the better your odds of getting a favorable interest rate on a future mortgage, car loan or other line of credit. And a big part of achieving a stellar credit score comes down to building a proper credit history.
"In order to qualify for a FICO score, you need to have some credit history that will allow the algorithm to assess the likelihood that you'll repay various credit obligations over time," says Frederic Huynh of FICO, the company that developed the popular credit scoring system. "Using a credit card as a means of repayment is one way to build up that history."
Worried that you'll overspend? According to Huynh, just using your credit card to buy something small each month, like a pack of gum -- and then paying off that charge without delay -- is enough to build a strong credit history.
No. 2: You want to accrue rewards: Although some debit cards do offer rewards, the perks offered through credit cards tend to be more enticing. "In general, debit cards aren't so lucrative for banks, whereas the credit card market is hot right now, so there are bonuses and benefits," explains Brian Kelly, who runs credit blog The Points Guy.
A debit card rewards program, for instance, might offer you small, spending-based contributions to your checking account for a short period of time -- but credit card rewards may give you up to 3% cash back on certain types of purchases without a time limit.
No. 3. You're an avid traveler: While there are plenty of credit cards that reward travel through airline miles or points toward free hotel stays, debit cards centered around travel are few and far between. If you travel a ton and rank airline miles right up there with cash, it might pay to opt for a credit card that can grant you miles by the bucketful.
Some programs offer a mile for every dollar spent, while other cards offer 1.5 or even 2 miles per dollar. And that's not to mention sign-up bonuses, which can grant you tens of thousands of miles early on if you put a certain amount on the card in the first few months. Plus, many credit cards offer other travel perks, such as car rental insurance (as long as you paid for the rental with your card), emergency assistance and even a 24-hour phone concierge service.
No. 4: You want purchase protection. Some credit cards offer purchase protection if an item that you buy with that card gets stolen or damaged -- and that protection often covers you up to 90 days from the purchase date and for up to $500 in damages. Other cards will extend your manufacturer or retailer's warranty. And a few cards offer price protection: They'll reimburse the difference if you find the same item on sale elsewhere for less within a certain timeframe after you buy it. Some credit cards even offer return protection -- the credit card company will reimburse you (within predetermined time and price limits) if you try to return something and the retailer won't take the item back.
No. 5. You'd like to minimize your liability against fraud. If your card gets lost or stolen, you might have less liability for a credit card than a debit card. If a thief personally presents your credit card to buy something, you can't legally be held accountable for more than $50, and many card issuers waive that as a courtesy. And if a thief uses your card online or over the phone, you have no liability.
Meanwhile, if someone fraudulently uses your debit card, you must report the loss or theft within two days of realizing it. If you do, you won't be liable for more than $50, but if you miss that deadline, you're on the hook for $500. And if you receive a statement with fraudulent withdrawals or charges, but you fail to notify the bank within 60 days, you're liable for an unlimited amount.
More from LearnVest:
- How I pay for my life with credit card points
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- I cut up my credit cards and paid off $30,000
Use a debit card if …
No. 1: You tend to overspend. Although credit cards are a crucial way to build your credit history, you don't want to build up a bad credit history. "Some consumers may lack the self-control to rein in spending, and can get themselves into trouble, racking up balances that are very difficult to pay off, or worse, start going delinquent," Huynh says. "In this case, using credit cards can be a very bad thing for these people because it tarnishes their credit, has the ability to negatively impact their credit score, and can consequently limit access to credit going forward or increase the cost of that credit."
Bottom line: If you're going to use a credit card to spend more than you can afford, you might want to stick with debit instead.
No. 2: You're more of a cash person. If you normally prefer to use money, debit could be a more secure alternative to carrying around a wad of bills. If your debit card gets stolen, you should be able to recover the damages without being held responsible for any charges -- as long as you report the theft right away. Your debit card provider can also freeze the card, so the transactions stop.
And if you need to get cash on the go, your debit card may offer access to ATM machines without a fee (or your bank may reimburse you for them). But if you take a cash advance on a credit card, you're charged interest at a much higher rate than the rate on an actual purchase.
No. 3: You want to earn rewards on your tax bill. One exception to the credit-cards-offer-better-rewards rule? Paying taxes. Payment processors typically charge a flat fee of a few dollars when you pay your tax bill using a debit card, but if you pay by credit card, they charge a percentage of the total.
So if you have one of the few debit cards that offers significant rewards, putting a large tax bill on a debit card can earn you significant rewards -- and you'll pay a smaller fee than you would using a credit card. "If you have, say, a $30,000 bill, then you're only paying $3.49 to earn 30,000 airline miles," explains Kelly of The Points Guy. Just keep in mind that airline rewards debit cards often carry annual fees, but if you spend enough, you may consider that fee worthwhile.
Can I use both?
Of course, you might find yourself in a few of the above situations. That's why plenty of people maintain both debit and credit accounts, so they have flexibility. Maybe you'll use a credit card for big buys that could use purchase protection, but you'll whip out your debit card for a small purchase at the convenience store.
Whatever your personal calculus, that next time that a store clerk asks, "Debit or credit?" you'll not only have an answer -- but a good reason for your decision.
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VIDEO ON MSN MONEY
Use your bankcard as a credit at a gas station and rack up points as well. Every year I pay for Christmas with my points. It has been usually 4-6 hundred every Christmas.
what is better debit cards or credit cards? answer debit cards if you cant pay it in cash you don't charge it. I haven't had credit cards for around 20 years oh and by the way my credit score is 747.
you know how i did it i canceled all my credit cards 25 years ago got a part time job and paid off 25,000 dollars of debts in 2 years. It took me a little bit to get a savings and then i started to save up and started paying everything with cash using an debit card. To get my score up to 747 I left bofa and went to iqcu credit union got a checking and savings account started putting money in it and asked if i could get a 6 month unsecured loan they gave it to me and i paid it back in one year. I did this several times and got my credit score up and i sit secure right now. the old adage charge only two things a house and a car and pay for everything else in cash makes for a happier secure life is true probably means a lot less divorces also.
oh by the way don't try keeping up with the jones it will keep u in debt just take it easy live in your means save your money. that way you can have fun when u retire while those that had to be better then the jones can stay at home blaming all the others for their troubles. Oh and while u people are trying to look good keeping up with the neighbors proving you are better then them i am enjoying the island of kauai in hawaii while you guys are in hot arizona, or humid florida have fun dumb dumbs
I use a credit card because I get cash back, and it is an additional layer of fraud protection. I dont like the idea of money coming directly out of my account when the card is swiped if I didnt authorize the purchase. Banks are pretty good about crediting back fraudulent activity, but the money is withdrawn, then there is a period of getting it sorted out before they credit it back. If you run a lean checking account balance like I do, and have bills pending, you can see the problem.
When the headline promises a comparison between two things - at least follow through! What a stupid, misleading article - it's nothing more than a commercial for ONE side - a credit card - probably sponsored by some bank. Credit cards LOAN you money at a usually exorbitant, ridiculous interest rate. Credit cards are for buying something YOU CAN'T AFFORD right now when you 'just gotta have it'. Yeah, right, you're gonna pay the whole thing off at the end of each month, but how many really do that!? Cash back!? One percent back on $500 is $5, what do you OWE when your interest rate on $500 is 24% !?! A Debit Card uses the money ALREADY in your account, its just like an electronic check. You use a debit card confident you can pay for that article you 'just gotta have'!
Don't drink the bank kool-aid and load up on credit cards...
Credit. Pay the balance in full every month.
Debit cards are not to be trifled with.
I use both and will always use both. The only advantage I see to a debit card is it covers the small cost items I don't wan to use credit cards for. When I use a credit card it's for deferred interest of 18 months or greater, or points and cash back. You need to be disciplined when using a credit card however and some people aren't able to realize this fact. Also some people don't understand a credit card is cash coming out of your pocket and interest if you don't pay it off every month or within the deferred period of the 18 months. a 18 month deferred interest finance is simple math, but some people don't understand this fact. Lets say you buy a item for 461.98 at 18 months deferred interest, then the payments will look like this: $461.98 divide 17 equals $24.18 monthly payments rounded off of course well give you what is important to pay every month. I always pay more and pay it off at 17 months or much less time. I have enough cash to pay it off in full at the bank anyway in savings.
Points and cash back credit cards are much different and I treat tem as I'm spending cash because I pay them off every month, if you don't then the interest will est up your benefit from the card. It's not that difficult to use a credit card correctly, but some do struggle with the with credit cards so perhaps it's best they avoid using them.
You do know that you can use a Debit Card as a Credit Card, yes? It is not much different. Except the money is coming directly from your bank account. NO worries! NO extra bills. Those who pay off your credit bill in full each month. I'm glad you like receiving that extra bill... I prefer to have as few bills as possible. I prefer to buy things right then and there. I don't want to have to wait a month before I pay for it.
I use my debit card as a credit card and am just as protected as anyone else who uses a "real" credit card. I prefer only to receive bills that deal with cost of living. When I buy a car, I rather pay the full price in cash so I'm not paying interest.
I have a 800 credit rating and have no need to have a credit card.
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