Credit card vs debit card: advantages and disadvantages

Credit card vs. debit card: What are the main advantages and disadvantages of using either?

Credit cards can be more convenient since you have more time to pay. You also typically have greater fraud protection and perks. However, you may also have to pay interest charges and could get into debt.

Credit cards are the best way to make purchases, but you have to use them responsibly.

Luckily for you, I’ll show you the advantages and disadvantages of credit and debit cards. I’ll help you decide if you should be using credit or debit for your next transaction.

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Credit Card vs. Debit Card: Advantages and Disadvantages

Credit cards come with greater protection, payment flexibility, and build credit when compared to debit cards. However, credit cards have the disadvantage of fees, interest, and can lead to overspending. Therefore, credit cards are ideal for those who use them responsibly and pay them off every month.

Let’s take a look at the benefits of using credit cards when compared to debit cards.

1. Credit Cards Offer Better Protection Against Transaction Errors

When you pay with a debit card, the funds are automatically withdrawn from your account. This account is usually a personal or business checking account. However, it could also be a digital wallet.

Although you can dispute debit card transactions, it can take weeks to get your money back. Credit cards don’t remove money or cash from an account. Instead, the amount is a charge you agree to pay later.

This makes it easier to dispute incorrect and unauthorized transactions. The card issuer will place the full amount in dispute. You won’t have to pay the charge until you resolve the disputed amount. The charge gets removed or reduced to the correct number in most cases.

You won’t have to worry about missing money or waiting weeks to get a refund. If a charge is not authorized, you won’t be held responsible. In the case of missing merchandise, the merchant may send you a replacement instead of a chargeback.

2. Credit Cards Offer More Time to Pay

Credit cards give you more time to pay for your purchases. This can make it easier to stretch your budget between paychecks. Say you need to buy $150 worth of groceries. But you only have $75 in your checking account.

Without a credit card, you’d have to put some items back. However, with a card, you can make your purchase and wait until your next paycheck comes in. Credit card statements usually run on 30-day cycles, giving you additional flexibility.

Making purchases on credit also lets you make smaller payments toward larger purchases. As long as your credit limit permits, you can charge high ticket items or vacation expenses. Then, you can divide the total by the number of months it will take you to pay.

3. Credit Cards Establish a Credit History

Using a debit card doesn’t impact your credit report or score. Even if you manage the money in your checking or digital wallet account wisely, it won’t boost your FICO score. But using a credit card allows you to build a history.

The length you’ve used the account, your revolving balance, credit limit, and payment history go on your record. If you keep your balances within 30% of your limit and pay on time, you can raise your score. On the other hand, you can hurt your score with delayed or missed payments.

You can also lower your score if you charge too much. Say you regularly charge up to your limit or make minimum monthly payments. Your debt-to-income ratio will increase. Plus, your revolving account balance will be too high. This will lower your score slightly.

4. You Can Earn Perks or Rewards with Credit Cards

Most credit cards offer specific perks or rewards. You could earn points or a dollar value toward purchases at select merchants. Some cards also let you use points or dollar values toward other accounts.

For instance, let’s say you have a mortgage, savings account, and credit card with the same bank. The rewards you earn with your credit card purchases can go toward your mortgage’s principal. Or you could use that money as extra deposits in your savings account.

Other cards give you credit or points toward vacations, including complimentary airfare or hotel stays. By using a credit card, you can score a well-deserved getaway.

The possibilities for rewards are expanding nearly every day. Credit cardholders have more flexibility than ever with cashback points or rewards. One month you could save at a popular retailer. The next month you could request a check or make your card’s minimum payment.

5. Credit Cards Offer Better Protection When Traveling

Using a credit card to pay for a rental car or certain travel expenses can be beneficial. For instance, your card may offer protection against collision damage when driving a rental car. This can save you from using your personal insurance policy or paying extra.

While rental car companies offer insurance coverage, the fees are high. Using your credit card’s protection will help if you get into an accident. And if you don’t, you’ll have peace of mind without having to pay extra.

In addition, some cards offer travel insurance protection for things like airfare. If your flight gets canceled or you miss it, you might be eligible for reimbursement. Or if you have to cancel your booking, the insurance will let you get a refund.

Travel insurance will kick in even if the airline sells you a nonrefundable ticket. You’ll get your money back or get a credit toward future purchases.

6. Credit Cards May Offer Additional Warranty Protection

Making purchases on credit cards can offer extended or additional warranty protection. Say you ordered something online, and it was successfully delivered to your address. The carrier has proof that your package arrived safely.

However, a porch pirate came behind the driver and stole your package. You can report the items as stolen to your credit card company. If the carrier or vendor isn’t willing to give you a refund, your credit card may refuse to pay.

This protects you against charges when you don’t receive the orders. In addition, let’s say a product comes with a 30-day warranty. Purchasing the same item on a credit card may extend that to a year. If something goes wrong, you can get your money back or a replacement.

7. Credit Cards Make it Easy to Overspend

One of the problems people run into with credit cards is overspending. Since debit cards are tied to money you already have, it’s less tempting to break your budget. But credit cards come with a limit that represents funds you don’t have in the bank.

You might think a $5,000 limit gives you a license to spend. Consequently, you can easily accumulate debt and stay in debt. This is especially the case if you live on a limited income.

Once you build up big balances, they keep accumulating interest if you don’t pay them off. Interest rates on credit cards can be high, sometimes near 30%. So if you charge $2,000 and only pay $25 toward that balance, you’re paying a premium.

Keep paying only $25 each month and making charges, and you get the picture. You’ll remain in a debt cycle that requires significant change. You either have to find more money to pay more than the minimum, stop charging, or both.

Some people also declare bankruptcy or go into a debt management program. Your credit card gets turned off, and you can’t make new charges. You might get a reduced interest rate or more favorable payment terms. However, your credit history will get a black mark.

8. You Could Pay More for Your Purchases with Credit Cards

Speaking of interest, it’s another major downfall of using credit cards. The only way you’ll avoid interest is if you pay your outstanding balance in full each month. Otherwise, you’re going to be paying more for the things you buy on credit.

Let’s say you buy a $10 pair of shoes. Your monthly interest rate is 2.08% of your outstanding balance. You add that $10 purchase onto an existing balance of $1,000. You only pay $30 toward your new balance of $1,010.

That $30 goes toward the older portion of the balance, leaving $980 outstanding. Now you’re accumulating more interest on that $980, including your shoes. Next month, you can look forward to over $20 in interest charges. And that’s if you don’t buy anything else on credit.

Over time, that original $10 purchase could balloon to $30 or even hundreds of dollars. It all depends on what you pay off and how much you charge.

9. You Can Get Late Fees with Credit Cards

Make late payments on a credit card and you will get slapped with late fees. These late fees can be a percentage of your balance or a flat amount. Even if you miss your payment cutoff by a day or a few hours, you’ll get that charge.

Late charges can add up quickly at $25 or $35 a pop. You’ll pay interest on those fees if you don’t pay your monthly balance in full. Late fees could make you go over your credit limit, too. This means you could get an additional charge for going over your limit.

You see how making late payments can cost you. However, the card issuer will also report you late to the three major credit bureaus. Your credit reports from Transunion, Experian, and Equifax will show you didn’t pay on time or as agreed.

This could impact your ability to qualify for future loans or rental agreements. Late payments and similar blemishes on your credit report will jeopardize your future potential and purchasing power. Your card issuer may even lower your credit limit as a result.

10. You Might Tarnish Your Credit Record with Credit Cards

One or two late payments probably won’t impact your credit score that much. As long as you recover and make consistent on-time payments, you’ll maintain a good credit history. But if you overspend and make late payments all the time, your score will sink fast.

It’s much more difficult to recover from a poor score. In contrast, moving a good score up to an excellent one doesn’t take much time. Once you drop below 650, you may spend years cleaning up your record. You may have to start over with a secured credit card.

A secured credit card often comes with lower limits, higher interest rates, and larger fees. And you’ll have to put up collateral to establish a credit limit. For example, you’ll deposit $500 with the bank to get a secured credit card with a $500 limit.

The collateral is something the bank can draw on if you fail to make payments or default. The missed payments and default still tarnish your credit record, though. Plus, you’re out the money you put up for your deposit.

11. Losses Can Still Occur with Credit Cards

While many credit cards offer fraud protection, some hold you liable for small amounts. For instance, a few cards won’t credit you for stolen packages with values under $50. The card issuers may resolve any disputes you open and direct you back to the merchant.

If a product arrives in a defective state, you might lose out. You typically have to resolve minor purchases with the merchant or carrier. Some may issue you a store credit for later use. This means you’ll still have to pay the charge on your credit card statement.

These charges and balances can add to your interest charges and late or missed payment fees. Look at your credit card’s terms of agreement very closely before using it for these purchases. In addition, it’s also difficult to file claims against restaurants and food purchases.

Summary: Credit vs. Debit Card

So, there you have it. We’ve explored credit card vs. debit card: advantages and disadvantages. Using a credit card instead of a debit card can help you stretch your paycheck and budget for larger expenses.

You’ll also get more protection against fraudulent and incorrect transactions. You can take advantage of perks, including travel insurance. And you can help build your credit history and possibly raise your score over time.

That said, high credit card limits can lead to overspending. You could accrue interest charges and fees. There’s also the possibility you could damage your credit history. This is why it’s best to use credit cards wisely and with some restraint.

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