Credit Cards versus Debit Cards

Most consumers typically have both a credit card and a debit card. Of course, the biggest difference between the two is that a debit card will immediately take money out of your bank account when used, unlike a credit card, which will pay for the purchase and later add the amount of the transaction to your monthly statement.

But are there any other differences between the two?

It turns out that there are some major differences that you may not be aware of. Also, it’s important to note that both debit and credit cards have their own distinct advantages and disadvantages.

Here are a few situations where choosing between a debit and a credit card can make a great deal of difference:

When You’re on a Budget

A debit card is the clear winner when it comes to sticking to a budget, since you can only access funds that are already in your bank account. Of course, the possibility of over-spending still exists with a debit card, but the fact is that sticking to a budget can be a lot harder when you have the temptation of the buy-now, pay-later scenario that credit cards offer.

Cash Back and Other Rewards

Credit cards clearly excel in this category, with users being rewarding with everything from cash back on monthly spending to accessibility to other discounts and travel bonuses. Of course, these bonuses are negated if you carry a large balance on your credit cards, but can be extremely profitable if you pay off your credit card balance each month.

Renting a Car

If you rent a car, using a credit card can usually offer you more protection than using a debit card, although some car rental agencies are changing this as more consumers begin to use debit cards to rent cars. But as it stands today, if you use a debit card to rent a car, you will typically also have to provide a back-up credit card to protect yourself against possible damages incurred while driving the car.

Credit Scores

Using a debit card will do nothing to increase or decrease your credit score, while using a credit card responsibly can help you build your credit. Of course, if your credit card is not used responsibly and you incur over-limit fees, late payment penalties, or over-utilize the card, your credit score can drop as well.

Liability Limits for Lost or Stolen Cards

Credit card companies offer the most protection against lost or stolen cards, with a maximum of $50.00 for any unauthorized charges, providing that those charges are reported on a timely basis. While some banks offer the same level of protection for debit cards, the debit card holder will have to report the lost card or erroneous transaction within 48 hours to be guaranteed the same $50.00 maximum liability level. The same goes with transaction disputes, with some banks matching credit card liability levels, while others do not offer the same protection. It’s clear that both debit and credit cards have their own very specific place in your wallet. It’s up to you to use them both to your advantage.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2021 Advisor Websites.