When it comes to using a debit card vs. a credit card, cardholders frequently pick a side. At Organized Instincts, we have settled on this: “it depends” – how you handle your spending and risk factors. Today we will explore reasons why you’d want to use one card type over the other. Let’s dig into the details, and help you pick the winning side in this debate.
By definition, debit means an addition to an expense. Debit cards, formerly known as bank cards or check cards, activities are tied directly to your bank account and balance. This connection presents both opportunities and misfortunes. Do you have a habit of regularly racking up expenses above your monthly income? Utilizing a debit card helps tame unruly spending habits by constricting your outlays because purchases are immediately declined when you have insufficient funds. Do you fear incurring overdraft fees due to your spending? Inquire with your bank about its debit card overdraft services. Traditionally, you must opt to participate in this service that essentially allows the purchase which taps into a backup funds source such as a savings account or line of credit. Frequently, spending via debit card makes you more mindful of purchases when the amounts are immediately withdrawn from your bank account.
If you need cash, debit is the smart choice as well. ATMs and brick and mortar banks are available for satisfying your cash withdrawal needs. If cash withdrawals are the only reason you carry a debit card, contact your bank to issue you an ATM card. This card can only be used to withdraw and deposit cash, but cannot be used anywhere else for purchases. This card type adds a layer of protection to you.
Debit cards, however, certainly have a downside. When you use your debit card, especially online, you become vulnerable to fraud. The more you utilize it for purchases, the more you increase chances of exploring your card number. Once your number is compromised, scammers can quickly drain your bank account, leaving you without access to funds plus it prevents other transactions from processing, such as your mortgage, utility, and other bill payments.
Some banks offer protections against fraud, however you’re likely to have limited or no access to funds while the bank conducts their fraud investigation. Once your money leaves your account, chances are you won’t see it again. This is an argument against debit card use and makes a strong case for why you should use credit cards for certain purchases.
If you frequently go online, it’s a safer option to use a credit card. In fact, we suggest having a card dedicated for this purpose, an “online-only” credit card. This allows you to make your purchases without risking the funds in your bank account. If you’re unfortunate to run afoul with a seller for goods you didn’t receive, canceled services, or returns not refunded, utilizing your card issuer dispute process gives you a powerful advocate against a naughty retailer or website. For high dollar purchases, credit cards offer buyers protections for damage or theft or an extended warranty become valuable.
For those looking to establish or improve their credit score, limiting credit card use for small monthly recurring charges such as required subscriptions, mobile phone bill, or car insurance are good examples to use your credit card limit and to build a quality history. Using your card in this way, you positively affect your credit score with consistent fully account statement payments.
When booking travel, it is best to use a credit card to secure reservations at a hotel or a rental car which frequently place a hold on funds—meaning a percentage of your estimated total bill is placed on your account. This essentially tied up your power and you will not be able to spend it—until the final bill is computed. Using a credit card for travel also allows protection, which can reimburse you for disrupted travel or repair rental car damage.
Credit cards are perfect during an emergency as well. Accidents, property damage, medical bills, whatever it is, you know you have a line of defense that won’t drain your bank account.
You can use your credit cards for everyday purchases if you are consistent in paying off your balance. This also helps your credit score in the long run. Did you know you can take a cash advance on a credit card? While you can technically withdraw cash from a credit card, it comes with high interest rates and fees, normally around 2% of the cash advance. We never suggest utilizing a credit card for accessing cash because of the transaction fees plus interest charges; which is assessed at a rate higher than that of normal purchases!
However, credit cards are beloved by many due to the rewards issuing companies offer. This includes rewards such as cash back, points, or miles. If you use your credit card often enough, these rewards stack up and you might enjoy a free first class upgrade on your next flight or a complimentary hotel suite upgrade.
Training Wheels for Young Card Users
A popular company has emerged on the scene that acts like a debit or a credit card but is not affiliated with a bank account. Greenlight is a banking app launched to help parents teach their children how to manage their money. Children and teens receive a card that parents or guardians can load with money.
Backed by Mastercard and FDIC insured, this unique debit card is not tied to any specific bank or credit account creating a protected and monitored way for learning sensible financial habits. It is a completely separate entity and only holds a finite amount of funds, eliminating the hassles of conventional bank accounts with tweens and teens.
Greenlight’s mission is to help children and teens manage their money well and get used to the world of online banking and making online purchases. Since these debit cards are backed by Mastercard, they are accepted almost anywhere so your child can shop as they will. Greenlight is an excellent choice for any parent who wants to ease their children into the realm of using a card.
At Organized Instincts, our seasoned team of daily money managers can help you choose when to use a debit or a credit card for your purchases. Schedule a free consultation today and make the best decision for your finances.