Is there anything more annoying than loose change? It fills up your cup holders. Ends up at the bottom of the washing machine. And somehow never seems to be around when you need it for a parking meter. Cash can be messy. Not to mention losable.
Credit cards and debit cards are two options for leaving physical cash at home safely in your piggy bank. And while these two types of cards look the same, they’re actually quite different. Which is why before you make your next financial move, you should carefully consider the pros and cons of a credit card vs a debit card.
What Is a Credit Card?
Credit cards are generally offered by banks, credit unions, or other financial institutions. However, these sources often require credit holders to have a good credit history.
If you don’t have a strong credit history, one option could be securing a credit card through a retail store. Sometimes stores that offer credit cards don’t require as high of credit scores. Sometimes credit cards offered through stores can offer borrowers the opportunity to build credit history if getting a credit card through a bank or other financial institution isn’t an option.
A credit card is a form of credit, which means that you are borrowing money. The money will need to be repaid at a later date.
Credit cards allow people to make purchases, but depending on the type of card you have and when you make repayments, you might have to pay interest.
When looking for a credit card, it could be a good idea to look for a low interest rate or an APR (annual percentage rate). The APR tells you how much interest you will pay annually. To put it simply, the lower the interest rate, the less money you will spend on interest.
Before you apply for a credit card, it can be worth comparing a few different options, typically at least three cards. That way, you can find the best deal. When comparing credit cards, review the APR (for the lowest rate), any fees associated with the card, and the amount of time you have after making a purchase to pay your balance without incurring interest.
Some credit cards also offer rewards. When using credit cards wisely, a rewards card can offer benefits to the holder. As you are comparing credit cards it could be useful to review any rewards policies.
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The Pros and Cons of Credit Cards
What are the pros of using a credit card, aside from the fact that they allow you to borrow money?
If you’re online shopping, you may want to consider using a credit card. Generally, credit cards are considered safer to use when you make online purchases. If your credit card number is stolen online, and you report the theft right away, you are legally only liable for $50 of any purchases made.
Consider that when it comes to credit vs debit, if your debit card number is stolen online, the thief can potentially take all of the money out of your account. While debit cards do come with increased risk when compared to credit cards, there are some protections in place to protect consumers against fraud.
These protections largely depend on how quickly you reported the issue. Generally, the earlier you are able to report the issue, the more you are able to limit your risk.
If the bank is notified that your debit card has been lost or stolen before any fraud occurs, you won’t be held responsible for the charges. Your loss is limited to $50 if the bank is notified within two days of learning about the theft.
If you report the fraud within 60 days of the statement date, you could limit your loss to $500. If you fail to report the fraud within 60 days of the statement date, you could be held completely responsible for the charges on your account.
Credit cards in general have regulations that protect you from unfair practices. These regulations give you the right to dispute charges on your credit card if you believe you didn’t make a purchase. And they allow you to file complaints with your credit card company.
Another major benefit of using a credit card is that if you make your payments on time, and don’t use up all of your available credit, it’s possible to build your credit history. Some credit cards will even offer rewards for spending money such as earning “points” that go towards paying for flights, hotel stays, or gift certificates to popular retailers.
Of course there are cons to using credit cards too. Primarily, you can incur fees and interest. You only have a select number of days before you have to pay your bill in full, or risk having to pay interest charges.
Potential fees vary, but some credit card companies may charge fees if you get a cash advance, make a late payment, or spend more than your credit limit. Some companies or cards may charge annual fees for simply being a cardholder.
What Exactly is a Debit Card?
If you’re looking for a debit card, look no further than your local bank. Most banks or credit unions will give you a debit card when you open a checking account. Depending on the bank, sometimes the debit card will be free to use and other times you may pay a fee.
Debit cards look identical to credit cards but function differently. Unlike a credit card that uses borrowed money to make purchases, debit cards are generally used to spend money that is already in your checking account.
When you receive your debit card, you will get a “PIN”, a term that stands for a personal identification number. When making purchases with a debit card, you’ll typically need to enter your pin on a keypad before finishing the transaction.
This step protects your money from someone besides yourself trying to use your debit card. For security, it’s best practice not to share your PIN with anyone.
The Pros and Cons of Debit Cards
What are the pros of using a debit card? To start, they allow you to spend cash without actually carrying it around. Most stores accept debit cards as a form of payment. You can also use your debit card to withdraw physical cash from an automated teller machine (ATM).
Depending on the store, you can even ask for “cash back” when you make a purchase. Another major benefit of using a debit card vs a credit card is that you won’t pay any interest as you can’t borrow money with a debit card.
What are the cons of using a debit card? When you make a purchase with a debit card, the money is usually taken out of your checking account immediately. Meaning you can’t rely on a debit card to lend you money.
Another con of using debit vs a credit card is that you won’t build your credit history when making responsible purchases. But this means you also can’t typically hurt your credit history when using a debit card which is another positive attribute to consider.
As mentioned earlier, if there are any issues with charges due to a lost or stolen debit card, your personal liability is a bit higher than it is with a credit card.
Choosing Between Credit and Debit
You don’t have to choose between having a debit vs credit card. You could have both and utilize their best features to your advantage.
Credit cards can be an effective tool to help you build your credit as long as you’re able to pay off the credit card each month.
If you know you can make your payments on time, and avoid pricey interest or fees, you can take advantage of the rewards programs offered by credit cards safely.
Debit cards can be an option if you want to ensure you only spend money that you have in your bank account. Credit cards are likely safer for online purchases, but you can use debit cards at ATMs or retailers to receive physical cash.
Protecting your financial health should be your top priority, so consider your purchases carefully when using a debit or credit card. Since your debit card is a direct line to your cash, it can make sense to review the security policies offered by the company you bank with.
If you’re looking for a secure alternative, consider SoFi Checking and Savings®. This checking and savings account offers security features to help you keep your money safe.
With a SoFi Checking and Savings account you can benefit from active fraud monitoring so you can keep tabs on any suspicious activity in your account. Plus, in the event your card has been lost or stolen, you can easily freeze the account in seconds from the SoFi Checking and Savings app.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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