You may have two cards in your wallet. One is a debit card, and the other a credit card. They look the same. They are the same size, have 16 numbers, a magnetic strip on the back, a chip window. You can use either one when you go to buy something. You can put either one into an online wallet so you can tap your phone. What is the difference? Does it matter which one you use?
When you use a credit card, you are essentially borrowing money from the bank (or card issuer) with the promise to pay it back later. When you use a debit card, you are using funds you have in your bank account.
Debit cards have a few major advantages. You can get a debit card without a credit history; you just have to have money on deposit in the financial institution that issued the card. There are usually no fees unless you use your card at an ATM that is not associated with your bank. You have a choice about whether to allow an overdraft, and the bank will encourage you to sign a form to allow overdrafts when they issue your card. This means you can make a payment larger than the amount you have in the bank, but you have to pay an overdraft fee. If you opt out of this (and you should), your card will be declined.
Credit cards also have some advantages. You can buy things now and pay when you get your bill, usually a month later. If you have excellent credit, you might have a rewards card. This gives you cash back, or travel points, or discounts on certain products. Travelers will find that it is easy to use their cards in other countries, and they don’t have to worry about figuring exchange rates. Credit cards allow you to build a credit history, and a good credit history means you can borrow more in the future (think house or car) and get lower interest rates. You can develop a good credit history by paying your bills on time.
Credit cards, however, may charge an annual fee and a cash advance fee, and banks will have even more charges for customers with poor credit ratings.
The biggest advantage to using a credit card is the fraud protection! You can dispute something that shows up on your bill that you did not buy, and the charge is reversed, then investigated by the credit card company. If the investigation is in favor of the merchant, then of course you have to pay the bill. You can also dispute things that were damaged or lost during shipping. This protection makes it much easier to order online from companies you may not have heard of, knowing you have a recourse if you don’t receive the item. In a few cases you may have to pay something if you were negligent, but your maximum liability is $50.
Debit cards now offer some fraud protection. If you discover and report the misuse within 48 hours of discovery, you won’t lose your money. After that, your maximum liability rises to $500, but after 60 days, you’ve lost all rights. You won’t get money back until after the investigation is completed. If you bought an item with your debit card and it is broken or not delivered properly, you can only get your money back if the merchant is willing to cooperate.
The biggest disadvantage to using a credit card is that it is so easy to build up debt! Credit cards will only work for you if you pay your bill in full every month. Then you are getting interest-free loans and all the rewards.
But only half of all credit card users pay their bills off every month. If you only make minimum payments or partial payments, you pay interest from the date of the purchase. And your interest rate may be as high as 39%! If you cannot control your spending, then you should stick to using only debit cards.
Credit and debit cards may look alike, but their benefits and drawbacks are very different. If building credit and cashing in rewards is important to you, then credit cards are essential. If you need to keep a tighter rein on your finances, then a debit card is a better bet.