Debit or credit cards: Which one is better?

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While making payments, do you often have to think which one should you use - a credit card or a debit card? Do you often feel that if you would know which one to use when? If yes, then you should go through this article to know when to use a debit card and when using a credit card is best.

Before acquiring knowledge on whether to use a debit or a credit card, you should be clear about the difference between the two. When you use a debit card for a transaction, the amount gets directly debited or reduced from your account; whereas, in case of a credit card transaction, you have to pay the bill later.

Credit and debit cards - Which one to use when

You should consider these points to decide when you should use your debit card and when swiping a credit card is better.

  • You want to build credit - If you want to build credit, then you should use a credit card. However, you will have to pay your bills on time to establish a good credit history. When you take out a credit card, you start a credit history and it shows on your credit reports. So, you need to use and manage it responsibly. However, a person trying to build a credit history may not get qualified for a credit card. If you're facing similar situation, you can take out a secured credit card, wherein you deposit an amount that becomes your available credit limit. It may appear to you like a debit card but it's not. Debit cards don't have an impact on your credit score.
  • Making an expensive purchase - When you're buying an expensive item, you should always use a credit card. If you find any problem with the product you've purchased, then you can always dispute the charge if you've used a credit card. You can withhold payment and usually the credit card issuer will also investigate the problem for you. You cannot withhold payment when you use a debit card.
  • To earn rewards - In 2011, most of the banks are waiving off debit rewards programs. Moreover, a cash back credit card can help a consumer practicing responsible spending habits. Such a card can give him/her an opportunity to earn a little extra for the effort he/she is putting in. However, rewards credit cards usually come with relatively higher interest rates. So, while using these cards, make sure you pay off the outstanding balance at every billing cycle as otherwise, you won't be benefited much by using such cards.
  • When you are concerned about safety - It is advisable that you use a debit card when safety is your major concern. This is because, as per federal law, you are more liable for a fraudulent charge on a debit card than that on a credit card. After discovering that you've been a victim of identity theft, you're required to report it within 2 business days. Failing to do so, you've to pay much more on a debit card as compared to a credit card. There's another reason to use a credit card in such cases - an imposter may use your debit card PIN to withdraw a lump sum amount from your bank account instantly.
  • To control your overspending - If you want to curtail your expenses, then you should never use a credit card; using a debit card is the suitable alternative. As already mentioned, the amount gets debited at once when you use a debit card for making financial transactions. So, you cannot spend more than what you have in your bank account. Therefore, you should use a debit card more when you want to check your overspending habit in order to manage your finances better.
  • Making payments at gas stations or hotels - When you use plastic money to make payments at hotels and/or gas stations, it is better to use a credit card. A retailer often puts hold on your debit card and it may prevent you from accessing your bank account till the debit transaction is processed. So, it may result in declined transactions or bounced checks. Therefore, try to use a credit card in these types of transactions.

Do you often forget the due dates of your bill payments? People forgetting paying their bills on time should use debit cards in most cases. However, keep at least one or two credit cards which you can use for making big purchases or when you're concerned about your safety.

Both secured credit cards and prepaid debit cards can be used at the checkout stand with your local retailer or grocery store. Both can be used to make purchases or to pay bills online.

That’s where the similarities end.

Reasons to choose between a secured and prepaid card

A secured credit card requires you to make a security deposit in order to start the account. The amount of money you will need to open a secured credit card can vary. Some secured cards can be opened for as little as a few hundred dollars, all the way up to several thousand dollars.
  • A prepaid credit card requires you to “load” the card with your money before you can begin to use it. There are some prepaid cards that allow you to have money auto deposited to the card, or you can load the card using cash.
  • A secured credit card will be billed monthly similar to an unsecured credit card. You must make the required monthly payment on time or late fees will be assessed. If you do not make a payment on time, the amount due will be deducted from the amount you have on deposit that secured the account when you opened it. Many of the cards available charge a monthly fee for the account. The best secured credit cards only have an annual fee. Look for a secured card with a low annual fee only.
  • A prepaid debit card may charge a “load” fee (for adding money to your card), a transaction fee every time you use the card, ATM fees for cash withdrawals, and monthly maintenance fees. Some prepaid cards do not charge you when you have direct deposits made to the card. There are no interest fees or late payment fees with prepaid cards.
  • With a prepaid debit card, you are using your own money loaded to the account. When you spend using the card, the balance decreases until the money is used up. This type of account does not report to credit reporting bureaus like Equifax, Experian and TransUnion. There are no credit score benefits to be gained from prepaid debit cards.
  • With a secured credit card, you use the card just like a typical unsecured card. You are establishing a monthly payment history. While you did establish the account with a security deposit, that money is not touched unless you fail to make a payment. There are many secured credit card vendors available to choose from. Be sure to select one that does send information about your account to the major credit reporting agencies if you are trying to establish, or improve your credit history. Just be sure to make your monthly payments with your secured credit card on time, otherwise you will defeat the purpose of using one to rebuild credit. You may want to take out more than one secured credit card and use it for small purchases each month followed by paying it in full each time you receive the bill.

There are different reasons why you may choose between a secured and prepaid card:

Compare the fees and costs of using a secured credit card and a prepaid debit card

The prepaid debit and secured card markets have become better developed in the last couple of years. As the market increased with more people using these types of cards, more competitive pricing has emerged.

You do have to be careful to shop for the right card, as there are many that still charge high fees.

Which card can help you establish or improve your credit rating?

Secured card helps you establish your credit gradually. Make sure you see it carefully. Use it to restore your credit.

Last Updated on: Thu, 10 Aug 2017

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