There are advantages and disadvantages to both a credit card and a debit card. Determining which type of card is better for you depends on how you plan to use the card and how responsible you are as a cardholder.
As you compare a debit card vs. credit card, understand the various benefits, fees, and uses.
Fraud protection
When it comes to the credit card vs. debit card debate, both debit and credit cards offer zero-liability protection on fraudulent purchases. But the process of getting your money back differs depending on the type of card you use.
According to the Fair Credit Billing Act1, the maximum amount you may lose on an unauthorized credit card charge is $50. The investigation will likely be over by the time your statement balance is due.
However, under the Electronic Fund Transfer Act2, your potential loss on a debit card may be as much as $500 if you report the fraud more than two days after it took place. Moreover, the bank may not restore that cash to your account immediately.
If you need that money now, you’ll be at the mercy of the bank. In both cases, you’re not responsible for any amount of the unauthorized transaction if you report the card missing before any fraudulent purchases take place.
Spending control
The winner on this debit vs. credit match-up one is fairly obvious. Because debit cards are linked to a checking account instead of a line of credit, the only way to go into debt with this type of card is to overdraw your account. And you can avoid this by opting out of overdraft protection.
It’s possible to use credit cards without debt, but avoiding the temptation may be difficult. It’s easier to overspend with credit cards than with debit cards.
Rewards
When comparing credit vs. debit, it’s also worth considering rewards. Rewards are a common feature of credit cards. Finding a debit card with a good rewards program can be difficult.
On the other hand, credit cards offer big profits for financial institutions, so they’re more competitive in offering rewards to entice people to use their cards more often. As such, you’ll likely find better rewards and big sign-up bonuses with credit cards.
Fees
Reviewing the card’s rates and fees as part of your application submission is a smart idea when applying for a credit card. When doing so, you’ll notice that most credit cards charge a slew of fees.
Late fees, cash advance fees, balance transfer fees, and foreign transaction fees are all common among credit cards. Some even charge an annual fee. And that’s all on top of interest charges if you carry a balance.
Debit cards, on the other hand, typically don’t come with many fees. If your checking account charges a monthly fee, you may be able to get the fee waived by using your debit card regularly.
Credit building
Credit cards can help you build your credit and demonstrate that you are a trustworthy borrower. Credit card companies report your borrowing and payment history to the three major credit bureaus – Equifax, Experian, and TransUnion. This helps shape your credit score.
Each time you use your credit card, your credit history is reflected on your credit report. This includes positive things, such as on-time payments and low credit utilization, as well as negative things, such as late payments or delinquencies. Your credit report information is then used to calculate your credit scores.
In contrast, debit cards cannot help you build your credit because you are using your own money. So, using a debit card alone won’t help you establish or build a credit history.
