Credit vs. Debit: Which Should You Use? | Financially Savvy Sundays

If you’ve been keeping up with our credit series, you know that getting yourself a credit card is one of the first steps you should take when you turn 18, in order to begin establishing your credit history. If you’ve taken the advice, you should now own both a debit card and a credit card!

Vendors have made it easier than ever to pay with cards, so carrying cash as a college student has become almost obsolete. Students swipe or insert their cards almost every time they buy something, instead of digging around in their wallets for cash. But which card should we use? Debit or credit?

Most people choose arbitrarily, or pay with credit if there isn’t enough money in their bank account to cover the purchase upfront. But there are situations where using a credit card is preferable over using a debit card, and vice versa.

The Difference Between Debit and Credit Cards

Debit cards function as electronic cash. They work by pulling money out of your bank account that you’ve deposited earlier. Your spending limit is the amount of money that you deposited. If you try to spend more than your available balance, you’ll usually get charged an overdraft fee ($25-$50 each time)—which is an important and predatory revenue stream for banks. However, there are checking accounts that don’t charge overdraft fees, and you can also set up overdraft protection if available—where you can link a backup account to your checking account to withdraw extra money from. To complete the transaction, you enter a PIN and/or sign your signature.

Credit cards allow you to borrow money from the bank, credit union, or other issuer. You can spend up to your established credit limit, which is generally higher than the amount of money you have in your bank account. This gives more freedom & flexibility, but can be dangerous for compulsive spenders. If you exceed your credit limit, several things can happen. You can get your attempted purchase declined. You can also get charged an over-limit fee if you enabled over-limit protection. Or your transaction will go through without an extra charge. If the transaction goes through, your credit score will be significantly damaged. There is usually no PIN needed to purchase with a credit card; signing your signature is enough.

Debit Card Advantages

1. Little-to-no extra fees: Debit cards tend to have less hidden fees (i.e. no late payment fees or interest charges) than credit cards do. Most checking account fees are also waived for students (be sure to check fine print though; policies can differ among different financial institutions).
2. Controlled spending: Because you don’t want to pay overdraft fees, using a debit card can help you be more disciplined with your spending. You can withdraw as much as is in your bank account, but no more.
3. Most transactions are immediate: When you use debit, the funds are usually immediately withdrawn from your account. This is useful if the other party needs to be paid immediately.
4. Cannot negatively affect credit score.
5. Can be used as an ATM card to withdraw cash.

When Should You Use Debit?

1. When shopping at small businesses (owners pay extra to process credit card transactions, so you could help them out by using debit/cash).

2. If you have credit card debt (so you don’t make it worse).

3. If you need to transfer the money quickly (time-sensitive purchases).

4. If you want to be debt-free and in full control of your money!

Credit Card Advantages

1. Credit card rewards: Many credit cards have rewards for spending, like cash back, travel points, and discounts! You can get valuable perks if you use your credit card for the right purchases (i.e. often, you can get a certain % cash back for purchases in certain categories, like gas stations and restaurants).
2. Establishes and builds your credit score: Using credit cards the right way will build up your credit history. Using it responsibly will reflect well on your credit score, which has huge benefits later on in your future.
3. Offers strong protection: Credit cards have better anti-fraud protection and easier transaction-disputing processes than debit cards. With a credit card, you have stronger protection against unauthorized purchases.
4. More spending flexibility: Because your credit card spending isn’t tied to available funds in your bank accounts, you can purchase things to be covered with future earnings (before monthly bill is due), and also use them in emergency situations if needed.

When Should You Use Credit?

1. When you’re shopping online and paying at gas pumps (better anti-fraud protection — both types of purchases are high risk for your card information getting stolen).
2. When making large purchases/electronics purchases (some credit cards offer their own warranty protection that’s better than the manufacturers).
3. When traveling (better anti-fraud protection).
4. When setting up recurring bill payments (more time to dispute billing issues due to the time credit card transactions take to process).
5. Whenever you’re a new customer at a business (better safe than sorry).
6. When you want to earn credit card reward points.

Making smart decisions about which card to use for each purchase you make can really benefit you in the long run! The first step is to understand the impact of using both types of cards, and we hope this helped with that.

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