Credit Cards vs Debit Cards

There are currently more debit cards than credit cards in the United States, with the two biggest providers, Visa and MasterCard, accounting for over 650 million debit cards in total. However, debit card use is on a serious decline, with roughly 50% of American households using these on a regular basis, compared to nearly 75% back in 2013.

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At the same time, credit card use is on the rise, and the industry is awash with credit card companies offering rewards, perks, and cashback benefits to lure consumers away from debit and towards credit. The question is, are Americans making the right choice, are credit cards a better option and is there even a need for debit cards anymore?

Benefits of Credit Cards vs Debit Cards

A credit card offers many more benefits than a debit card, which is why these cards are more popular, even though everyone has a checking account and therefore has access to a debit card. Some of the biggest benefits include:

1. Protection Against Credit Card Fraud

A debit card is connected to your bank account, which means it’s likely connected to every cent that you own. You should still get your money back if anything happens and may be covered in the event of any unauthorized charges, but you’ll always get better consumer protection with a credit card.

Credit cards have advanced fraud protection measures, limiting the risk considerably. They monitor your spending habits and detect anomalies, sending you warning messages and even preventing certain payments from being made if suspicions are aroused. They also provide additional layers of protection online, including programs such as Verified by Visa.

As per the Fair Credit Billing Act (FCBA), federal law requires lenders to cover most costs associated with fraudulent activity and insists that the borrower loses no more than $50 as a result of this. However, many credit card companies go one step further and offer $0 fraud liability, which means you won’t lose a penny, with all fraudulent charges returned and a new card sent immediately.

2. Build Credit

Debit card transactions are not reported to the credit bureaus, because there’s no credit involved. You’re merely spending money that you have, and no one is going to reward you for that. As a result, a debit card won’t show on your credit report or improve your credit score. 

A credit card, however, is a line of credit, and every repayment that you make, whether you’re clearing the balance in full every month or meeting the minimum payment, will appear on your credit report and improve your payment history.

A cardholder can use a credit card to go from bad credit to good credit in just a couple of years, greatly improving their financial situation and giving them more options with regards to mortgages and car loans. 

3. Get Rewards

Rewards credit cards incentivize you to spend, giving you points, air miles or cash back every time you swipe the card at the checkout, with extra incentives available for money spent at gas stations, travel purchases (flights, rental car) and more.

These rewards won’t offset the late fees and interest charges associated with not paying your balance in full at the end of the billing cycle. But if you do, you’ll earn essential cashback on everyday purchases and can put that cashback toward reducing your balance.

4. Travel and Insurance Rewards

Many credit cards offer additional benefits with regards to car insurance, cell phone cover, and travel extras, including discounts, rewards, and freebies. Check the card information before you apply to see what benefits your card issuer is offering you, and make sure you compare these to the interest rates and fees to avoid paying for them elsewhere.

Benefits of Debit Cards vs Credit Cards

Typically, someone who uses a debit card for all purchases is either recovering from debt and keeping their expenses to a minimum or is a frugal shopper and has little or no debt to worry about. 

Debit card users also tend to be very young, and therefore unable to apply for a credit card, or very old, and therefore heavily reliant on cash and cautious of all things digital.

But these cards are not just for people who can’t get credit and they actually have a few (albeit limited) benefits of their own, including:

1. Easier to Manage Money

Many debt experts recommend that you start using cash when making purchases, as we tend to be less willing to hand over large sums of cash and are also limited to what we have right now and not what we think we might have next month.

This doesn’t always apply, especially with younger generations, as they’re not used to spending cash. In this case, a debit card may actually work better, providing the same benefits by limiting them to money they have right now and dissuading them from spending large sums.

2. Less Risk of Debt

By limiting your purchases to your debit card, you’ll be less prone to overspending and getting yourself in debt, simply because you can’t spend what you don’t have. Credit limits can be tempting and it’s easy to convince yourself to buy something now and pay for it next month, only to make the same empty promise the next month, and the next month. 

Before you know it, that purchase has damaged your credit score, cost you a huge amount of money in interest, and continues to hang around. Of course, a debit card does have an overdraft and if you go over this you will be hit with overdraft fees, but consumers generally don’t treat overdrafts as useable credit, and they are often very small when compared to credit card limits.

3. Access to Cash

Cash is becoming redundant, but it still serves its purpose and some retailers and services rely on the exchange of paper currency. You can get cash from a credit card but doing so means you will be hit with cash advance fees, which can make regular cash withdrawals expensive.

However, a debit card allows you to withdraw cash as needed from an ATM. For many users, a debit card is little more than an ATM card they use to get cash on occasion, while a credit card can be used for all other purchases.

Conclusion: Use Credit; Keep Debit

Credit cards can provide many benefits that you won’t get with a debit card. That’s ultimately why these cards are so popular and why they are far more common. If you want to build your credit history and keep your cash secure, apply for a credit card, but keep your debit card on hand for use at ATMs and for when you’re seeking to limit excessive spending and credit card use.

And remember, while credit cards can help you in many ways, it’s also very easy to accumulate credit card debt, so they need to be used carefully to avoid giving you bad credit and a bleak future.