Credit Card Versus Debit Card. Which Is Better?

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Credit cards and debit cards each have advantages. Which one you use depends on your cash flow and making that monthly payment.

Borrowing Money Versus Using Money

Over 1 billion credit and debit cards are in circulation in the United States. American consumers have been using both kinds of cards more than cash or checks since 2003. And for the first time, debit card purchases have surpassed credit card purchases. So, which is better - using debit cards or credit cards?

The biggest difference between debit cards and credit cards is from where you are drawing the funds. By using a credit card for purchases, you are borrowing money from the credit card issuer. Each time you use a credit card to make a payment, you are accruing debt. You can pay off the balance in full within a single payment cycle with no interest, or over time with interest.

If you have a tendency to spend money before you have it, using debit cards instead of credit cards can help you avoid credit problems. With a debit card, you are using money that is already in your checking account where no interest is added to the cost of your purchases - another plus.

On the other hand, if you are very disciplined with your spending, and will reliably pay off your credit card balance in full each month, using a credit card instead of a debit card has some advantages.

Building Your Credit History

Want to build a good credit score to get the best rates on mortgages or car loans? All of your best habits and on-time payments made with your debit card don't help. These transactions are not reported to credit agencies like transactions on a credit card. Your credit score is more important than ever. Improving your credit rating with impeccable personal finances can help build a good credit history.

Floating Money - Pay Now or Pay Later

When you use a debit card, the funds are withdrawn from your account right away. If you use your PIN, the money is taken immediately. If you sign for a payment, the money is usually withdrawn within 24 hours. When you use a credit card, you can take advantage of what is called "float." There is a period of time between your purchase and the due date of the credit card bill. By keeping your money in an interest-making savings account, you can actually earn a little interest by making monthly payments on your credit card.

Making those monthly payments where you pay off the full balance is absolutely key to your advantage of using a credit card instead of a debit card. In order to be sure that you can completely pay off your credit card balance each month, you will need to determine a detailed monthly budget that outlines everything from groceries to utilities to gas, and even a little for miscellaneous. If you can't pay the credit balance in full each month, use a debit card.

Credit Card Safeguards

Both credit cards and debit cards offer safeguards to protect you from fraudulent use if your card is stolen. However, there are important differences in protection between debit and credit cards. The protection debit cards offer has certainly improved over the years, but they have greater limits than credit cards.

If your debit card is lost or stolen, notify your card issuer, your bank, immediately. If you call the card issuer within two days, your liability will likely be limited to $50. If you call after two days, you will probably have to cover $500 of any potential loss. If you somehow forget or fail to call your bank until after 60 days, you will probably have to cover all losses from that account. If you consider that someone stole your card to use it, then the amount of money you have to cover could be substantial.

Even if you contact you bank in a timely manner, the funds stolen from your account may not be replaced in a timely manner. You could find yourself in a cash-flow crunch where other transactions default, and overdraft fees begin to snowball. Your credit report could suffer. Because the trouble is with your bank account, as opposed to a credit card company's account, you will have to spend the time fighting to get your money back.

If your credit card is lost or stolen, and you contact your credit card company before any charges have been posted to your account, you will most likely avoid any responsibility for any posted charges. If charges have been posted to your account before you call the card issuer, you will probably have to cover only the first $50 of charges. Beyond that liability, the credit card company will handle the issues with any merchants that have been affected.

Credit Card Rewards and Services

Some debit cards offer rewards, but most are not as valuable as credit card rewards. With some credit cards, a small percentage of what you charge can be allocated toward a college fund or other account. Some credit cards offer a cash back feature where a small percentage of your purchases come back to you as cash.

Credit cards can also provide extended warranties on some products and insurance on for rental cars and airline travel.

Which is Better? Credit Cards or Debit Cards?

The choice between using a credit card or debit card boils down to one question: Can you determine a monthly budget, not exceed it, and pay the full balance of your monthly credit card bill each and every month? If you can, then move that debit card to the back of your wallet or purse and use a credit card along with the highest interest-paying savings account you can find. If you are not sure about your monthly cash flow, use a debit card. Though you are not earning interest or helping your credit score, you are acting with financial responsibility.

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