A correspondent asked:
Which is better for my financial health — using my debit or credit card?
Spender in Spokane
Should you use debit or credit cards for your everyday spending? The answer, like many personal finance questions, depends on your personality and your financial situation.
Let’s look at the most important considerations:
1. Consumer Protections
Credit cards offer better protections against fraud and other disputed charges. Many credit cards also offer other benefits such as extended warranties, insurance coverage for rental cars, and trip interruption coverage. These secondary benefits are not important until you need them and then they can save you a lot of money.
Debit cards do not offer you these options and you have more fraud risk. In the case of a disputed charge, your money is gone from your checking account until it is resolved in your favor. If you’re counting on those funds to pay next month’s rent, they may not be there. With a credit card, you typically do not pay any disputed charge while it is being investigated.
Advantage: credit cards
Both are convenient. Credit cards enable you to pay an unexpected expense up to your available credit limit. This can be useful for travel and emergencies. However, debit cards offer a similar option of overdraft protection (essentially, your bank loaning you the money). In both cases, you pay to borrow the money, unless it is immediately repaid.
3. Spending control
Credit cards can encourage overspending. If you’re not careful, you may find yourself with a balance that you don’t pay off in full. This can be especially true if you’re feeling social pressure to spend and don’t have an easy way to manage those dynamics.
Debit cards don’t have this same risk as you’re spending your own money and if you turn off over-draft protection, you won’t spend money you don’t have. If you don’t have your spending completely under control, a debit card is a better option to help you manage.
Advantage: debit cards
4. Credit Score
Because you spend your own money, debit card use has no effect on your credit score.
Credit cards can either improve or hurt your credit score, depending on your behavior. If you have a credit card and make your monthly payments on time, this should improve your score over time. However, if you make late payments or consistently draw down your maximum borrowing capacity, your credit score may get worse.
Advantage: could be either
Not everyone qualifies for a credit card but anyone with a checking account should be able to use debit.
6. Rewards Points
Credit cards often offer some sort of rebate in the form of cash back or travel rewards. Typically, this value is in the range of 1 to 2% of your spending. Debit cards rarely offer rewards of any value. If you spend large amounts of money, particularly in the context of work travel or purchases, this can be a valuable benefit.
Advantage: credit cards
Credit cards are the best option if you are able to control your spending on them and you pay them off in full each month. Your credit score should improve over time and the consumer protections they offer can valuable.
However, if you’re unable to control your spending or pay the balance off in full each month, then I recommend you go with 100% debit usage. If you can resist the temptation, keep a credit card in your drawer for travel and emergencies.
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