The terms “debit card” and “credit card” sometimes seem to be used interchangeably; however, there are major differences between these types of cards. Depending on the situation, these differences may make one card more favorable than the other. Here, the focus is on the benefits of credit cards.
Credit Cards vs. Debit Cards
To understand why credit cards are sometimes more beneficial than debit cards, it is important to know the differences between the two, which include:
- The payment source: With debit cards, you are using your own money that is deposited in a checking account. It works in the same way as writing a check. Credit cards, however, are loans from creditors which you pay back over time.
- The cost: While both debit and credit cards generally have associated fees, credit cards can be more costly than debit cards if you do not pay off the balance on time each month. Any balance that you carry forward will accrue interest.
- Building credit. When you use a credit card, you are building your credit. Debit cards, on the other hand, do not benefit your credit.
While debit and credit cards look the same, they work differently, and you have to figure out which is better for you. There are several benefits to choosing a credit card.
Building Credit
Every time you make an on-time payment on your credit card account, you will improve your credit score, which makes owning a credit card one of the simplest methods of building credit, especially if you have zero credit. On a less concrete level, you will also feel a sense of accomplishment when you pay your debt.
On the flip side, carrying a costly balance each month can hurt your credit over time, but this is only an issue if you do not properly manage your money. If you make timely payments, you will increase your credit score.
Secured vs. Unsecured Money
When you use your debit card, you need to have enough money in your checking account to cover the purchase, or the transaction will be declined. With a credit card, though, you are using the bank’s money to make a purchase, so you are completing the purchase with an unsecured loan. When you apply for a credit card, you are granted a line of credit that you can access to make purchases. These are considered unsecured loans, because you are not putting up any collateral for the money, as you would if you were purchasing a car or a house. These transactions come with a high cost in the form of the card’s interest rate.
There is an exception. You can apply for a secured credit card. To get one of these, you make an initial deposit with the creditor to have access to a line of credit. These cards are good for building your credit when you cannot get approved for a traditional, unsecured card.
Emergency Funds
Since many people do not keep thousands of dollars in their bank account to cover unexpected expenses and accidents, many turn to credit cards in emergency situations, which is a benefit of credit cards. A card can be used to help you get through a rough time, and you can pay it off when your financial situation improves. The key is that you must pay it off as quickly as possible to minimize finance charges.
Travel
If you plan on traveling, you will need a credit card to make reservations, as some hotels, airlines and rental car companies do not allow you to make a reservation with a debit card. Travel companies frown upon using a debit card because it is linked to a fixed amount of money in your bank account. Thus, it is smart to keep a credit card around for travel, even if you do not use it often.
Rewards
Unlike debit cards, credit cards often offer rewards for the money you spend using their card, which makes up for some of the fees associated with the card. Benefits can include cash back, free merchandise or special discounts. Most debit cards do not offer these options.
No Reason to Choose
The fact is, you do not have to choose one card over the other. You can carry both with you at all times. You may want to use your debit card to pay your bills but keep a credit card on-hand for trips. Perhaps you use your credit card for personal expenses and your debit card for business. Whatever your unique circumstance, do not be overly focused on the benefits of credit cards over debit cards. Use them both to help you better manage your financial situation.