Using a credit card is similar to taking a loan. When your credit card was approved, you are given a certain line of credit. The line of credit you receive is based on your credit history, your income, and your risk profile.
You can use your credit card for any amount below your line of credit. If you pay it off at the end of the billing cycle, you will not pay any interest. If you only pay the minimum amount, then you will pay interest.
Using a debit card is very similar to writing a check. When you buy something, it takes money out of our bank account. If you try to spend more than what you have in your account, your transaction will be declined unless you have overdraft protection.
Debit cards are also ATM cards that allow you to withdraw cash from an ATM.
Credit Card Pros
Credit cards allow you to collect rewards such as cash back, airline miles free hotel stays, or points. Some credit cards provide extended warranty for your purchases. In addition, some credit cards offer collision damage waiver (CDW) for rental cars.
Credit cards provide excellent fraud protection. If your card is stolen, it’s easy to get a refund from your credit card company. All you have to do is call your credit card company disputing the charges and you will get a refund almost immediately. The Fair Credit Billing Act (FCBA) limits your liability to $50.
Credit cards allow you to build credit score as long as you pay on time. Higher credit scores give you lower interest rates when you borrow money to buy a house or a car.
Some companies such as car rentals put a “hold” on your account for a fixed dollar amount. When the final charges are finalized, these companies charge the actual amount and release the other funds. Credit cards are ideal in these situations as no money is withdrawn from your account for the holds.
Credit Card Cons
If you do not pay on time, your credit will be affected. Also, if you overspend and cannot pay back the full amount, interest charges can pile up quickly.
Credit cards frequently change terms, including interest rates and the benefits they offer. It can be difficult to stay on top of the changes all the time.
There are thousands of credit cards on the market. It is very difficult to analyze their benefits their and choose the right card for you.
Debit Card Pros
If you only spend what’s in your bank account, a debit card is a good way to keep your financial discipline.
Debit cards allow you to withdraw cash from an ATM.
You are less likely to get into debt as you are not drawing on your credit line.
Debit Card Cons
Debit cards provide very limited fraud protection compared to credit cards. The longer you take to report the fraudulent activity on your card, the more it will cost you. It might take you longer, sometimes weeks, to get your money back.
If you are prone to spending money beyond your bank balance, the bank will charge you overdraft fees. The average overdraft fee is around $35.
Provide limited rewards compared to credit cards.
Spending on your debit card doesn’t allow you to build credit history.
As you can see, credit cards offer many more benefits than a debit card. For most people, sticking with a credit card makes sense.
But if you have problems paying your credit card on time or overspending, using a debit card will allow you to spend only what’s in your bank account. Debit cards also work well for people who like to avoid debt.