January 4, 2018

Credit cards vs. debit cards: What’s the smartest swipe?


In this age of plastic, it may seem like it doesn’t matter in the long run if you choose credit or debit. Weigh the pros and cons of both before making your purchase to make the best design that will impact your financial future.

Most people own at least one debit card and one credit card, however many couldn’t tell the specific details of the differences – both positive and negative  – between the two. Each have specific benefits as well as drawbacks that make them better (or worse) for some purchases than others. Here’s a guide to know which one to use – and when! 

For Budgeting

Pros to credit card: Credit cards send you a monthly statement, showing you what you spent and when. If you can use your card for certain monthly recurring items – like gas or groceries – you can start to see patterns in your spending on these items and help you to evaluate how to adjust your costs in these areas.

Cons to credit cards: Credit cards allow you to buy now and pay later, which can quickly turn into a budgeting nightmare. If you are tempted to overspend, regular credit card use is not ideal for you.

Pros to debit card use: Debit cards work like cash, meaning each transaction is a withdrawal from your account. Thus, it is much harder to incur debt with a debit card as you spend what you have. This removes a large part of the possibility of spending beyond your budget.

Cons to debit card use: If you do drain your account, most credit unions will cover you with overdraft protection. But, you will have to pay overdraft fees for your lack of budgeting plus the cost for the purchases.

For Security

Pros to credit card: Credit cards allow you to report suspicious charges within 60 days, and they are obligated to investigate and restore the funds if the charges are fraudulent. They also offer consumer protection on purchases. And you can cancel charges if you are the victim of an online scam. Credit cards can be a safe and smart way to make large purchases.

Cons to credit cards: If you use your credit card for large purchases for added insurance, be sure you are prepared to pay for them when the bill arrives. If you don’t pay your credit card in full, it is often hard to get out of the debt you created, especially when interest charges kick in on top of the initial cost of the items.

Pros to debit card use: If you alert your credit card to fraudulent activity immediately (within a day or two of the activity), you most likely will not be liable for the false charges.

Cons to debit card use: However, if you wait longer, your liability may go up. While many credit unions have implemented voluntary plans to limit customer liability to $50, there is no federal law requiring them to do so. Be sure you understand your financial institutions’ policies on both reporting fraudulent activity and also customer liability.

For Rewards

Pros to using a credit card: One major draw for credit cards is the points awarded for purchases. The ability to earn airline miles or cash back on purchases drives many people to use credit cards. When used properly, these awards can add up in the favor of the user.

Cons to using a credit card: Credit cards can afford to give these rewards because the profits they make on interest charges and late fees. Be sure you are paying your balance in full each month and not using the lure of rewards to create unhealthy spending habits. Don’t get hooked on points. Research each card carefully to make sure you’re really getting your money’s worth.

Pros to using a debit card: Many times credit card users do not see great gains from reward offers. If you are one that doesn’t follow rewards closely, stick to your debit card so you don’t worry about accidentally racking up more credit card debt than intended. And, if you have trouble not overspending, you will have increased trouble when incentivized with possible rewards.

Cons to using a debit card: By and large, debit cards are not tied to reward programs. So, if rewards are important to you, and you are good at understanding how to get them, stick with your credit card.

To Build Your Credit

Pros to using a credit card: Credit cards can help establish or restore good credit. Using a credit card and paying your bill on time, every month, can improve your credit rating.

Cons to using a credit card: Your credit score is not helped by racking up more debt or not paying your bills on time. If you cannot guarantee that you can pay the bill in its entirety each month, do not use your credit card to try to improve your credit score.

Pros to using your debit card: This is actually the pros to using the money you already have to improve your credit score. Paying your monthly bills on time is one of the biggest determiners of your credit. Before you charge your way into good credit, try paying every single bill on time for six months. When you can prove to yourself that you can pay all your bills each month before or on when they are do, then think about using a credit card (that you can pay off each month) to help establish your credit.

Cons to using your debit card: Your credit score also is largely determined by your debt-to-credit ratio, and, oddly enough, not having any debt can negatively impact your score. Taking on debt and paying them back on time shows a history of being responsible with debt. If you only use cash to buy everything, the credit bureaus will not have much to gauge how well you handle credit.

This article is for educational purposes only. Tulsa FCU makes no representations as to the accuracy, completeness, or specific suitability of any information presented. Information provided should not be relied on or interpreted as legal, tax or financial advice. Nor does the information directly relate to our products and/or services terms and conditions.