Debit or Credit Card?

The convenience of plastic, whether in the form of debit or credit cards, is hard to beat. They both offer advantages, yet have significantly different features, uses and some risks. Here is what to consider when deciding if you should make a purchase using a credit card or debit card.

Credit or Debit? What's the Difference?

Although banks issue both debit and credit cards, they are similar in that they look alike and belong to the same networks, such as Mastercard or Visa. However, there are important distinctions between the two surrounding debt.

A credit card is based on a loan from the issuing entity and represents debt to you — the card user. On the other hand, a debit card is self-funded by you through deposits made to the bank issuing the debit card. In other words, a credit card forces you to incur debt, while a debit card requires you to pay for purchases of goods and services with money you already have.

Advantages of Credit Cards

Credit cards offer many advantages to you as a consumer. Although different cards may have different sets of terms and conditions, those advantages may potentially include:

1. Building up your credit score, which increases your chances of qualifying for other loans, such as a mortgage.
2. The ability to borrow funds to make purchases if you do not have the money available to pay the entire balance amount when the monthly bill arrives.
3. Taking advantage of card incentives, like the ability to accumulate reward points, airline miles, or receive cash back when making purchases.
4. Receiving the card’s additional warranty coverage on merchandise above what is offered by the product manufacturer.
5. Getting insurance waiver coverage for car rentals, which could otherwise be costly if insurance is purchased through the rental agency.
6. Having reduced liability for lost or stolen cards, provided that the customer reports the event to the card issuer promptly.
7. Possessing the ability to dispute credit card purchases with the merchant, such as for damaged, stolen or lost goods during shipping.

Risks of Credit Card Use

1. Ease of potentially outspending your budget.
2. Fraud and identity theft.

Advantages of Debit Cards

Similarly, debit cards also offer distinct advantages to you as a consumer which may potentially include:

1. Enjoying no annual fees associated with a debit card.
2. Reducing the chance that you may fall into debt, since purchases are fully paid for out of your account balance.
3. Avoiding interest charges since you are drawing on your own savings balance.
4. Having money taken out of your account automatically for each purchase, so it is easier to use.
5. Setting up automatic transfers between accounts.
6. Withdrawing cash from an ATM or with some retailers at the point-of-sale.

Risks of Debit Card Use

1. If a thief does gain access to your debit card, it is all too easy for them to drain your bank account.
2. Fraud and identity theft.

Like credit cards, terms and conditions may be different between debit cards, so it is crucial that you understand which of these advantages apply to your specific card and which do not.

There’s no “best” card for everyone. Instead, the best card type depends on your unique financial situation, past credit history, comfort with incurring debt, projected use for the card, and what, if anything, you’d like in return for using it.