Credit Or Debit Cards—Which One Suits You Best?

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Don’t know whether a credit or debit card is best for you and your needs? Ask yourself these questions and learn about the pros and cons of each option.

Choosing between a debit card versus credit card?

What's the difference?

Debit cards are linked directly to your bank account, allowing you to withdraw cash or make purchases. Credit cards, on the other hand, are used to make purchases which are then paid monthly after a bill has been issued by the credit card company.

So how do you decide which is right for you?

debit card versus credit card

When I was young, my dad always taught me that credit cards are great if you use them properly.  He said credit cards are essentially 30-day interest-free loans. As long as you pay them back on time and in full, credit cards can give you financial flexibility and even rewards like airline miles or cashback. He was right, but as you get older you learn that your finances are often more complex than you initially anticipated.

Wading through the quagmire of debit and credit cards can be daunting, but here are some simple questions you can ask yourself to make it easy to decide whether a debit or credit card is right for you:

  • Do you overspend?
  • Does money or access to it burn a hole in your pocket? (Do you often spend your money as soon as you earn it?)
  • Are you in debt (exempting mortgages or business loans)?
  • Have you ever defaulted on a payment?

If you answered yes to all of the above then a debit card is the financially smart choice.  Let’s go through the pros and cons so you can see why.

The pros of choosing a debit card

debit card versus credit card

1) You are spending the money you have—not borrowing!

2) If you do not have an overdraft you will not be paying interest charges on purchases made.

3) You will always know where you stand and how much money you have access to at any time.

4) If you do not have an overdraft, you cannot spend more than what’s in your account.

The cons of choosing a debit card

1) Most banks do not offer points with debit cards, so you are not eligible for rewards such as airline miles, shopping/grocery vouchers, or cashback.

2) Your card will be refused if you do not have enough money in your account, which can be pretty embarrassing.

3) If you have fraudulent activity on your card, it often takes longer to fix, and can affect your immediate access to funds.

4) If you are paying for something in advance (like a flight), the funds will debited from your account at the time of purchase, rather than up to a month later when you pay your credit card bill.

If you answered mostly no to the first set of questions, try asking yourself the following:

  • Do you have a personal monthly budget that you stick to?
  • If you have an existing credit card, do you pay it on time and in full?
  • Do you put aside savings every month?
  • Are you able to curb your spending when funds are tight?
  • Do you have debt that needs consolidating?

If you answered yes to some or all of the above then a credit card may well be the right choice for you.  Let’s walk through the pros and cons of a credit card.

The pros of choosing a credit card

debit card versus credit card

1)   If you pay your cards in full each month, you essentially have access to a 20-30 day interest-free loan, which allows you to spread out your purchases.

2)   Many credit cards offer reward programs such as air miles, shopping vouchers, or cashback. Others offer significant discounts on dining and entertainment or perks, such as travel insurance.

3)   Fraudulent claims are often easier and more efficient to sort with a credit card, as there is a time buffer before monthly payment is required.

4)   If you are looking to consolidate debt, there are many cards that offer a 0% interest balance rate for a limited period. This lets you put your current interest payments towards paying off your debt.

5)   If you are short of funds, you can still make purchases. (Just don’t get carried away!)

The cons of choosing a credit card

1)   Credit cards give you access to more funds than you have, making it easier for you to build up debt if you are not financially disciplined.

2)   Credit cards have much higher interest rates, making debt harder to get out of than with traditional loans or overdrafts.

3)   Credit card debt can adversely affect your credit rating, especially if you miss a payment.

4)   If you are unable to make the minimum payments each month, most credit card companies will penalise you with a fine in addition to the interest charges.

The key is to identify your financial patterns and then find the right combination of cards for you. For some people, using both debit and credit cards makes the best financial sense.  Don’t forget that you can have credit or debit cards for specific purposes, giving you the best option for each expense and more control over your financial health.

What do you look out for while selecting a credit or debit card?

READ: Choosing A Credit Card: What’s The Perfect Credit Card For You?