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Updated on Thursday, November 19, 2015
Although similar in shape and both made out of plastic, the similarities between a debit and credit card pretty much end there. You’ve probably heard credit cards are “dangerous” or “addicting”, or any other myriad of scary terms, but the truth is, as with most things in life, a little discipline can go a long way towards reaping all the possible rewards that come with credit card use.
Of course credit cards aren’t for everyone, and in order to get to the benefits it’s important to understand some key differences between credit cards and debit cards. Here are three financial scenarios you might run across in your spending, and which is better to use in each situation.
When it comes to budgeting …
Winner: It’s a toss up
Here’s the truth: If you know up front that having access to as much money as your credit limit allows you to spend will be dangerous because it will tempt you to overspend, then you should stick with debit cards. Debit cards, as opposed to credit cards, are directly linked to your checking account, and the money you spend or withdrawal is reflected immediately in your account balance. However, if you are disciplined, using a credit card to budget your monthly expenditures — and pay them off in full, on time each month — can be a great way to build your credit score and provide you with better protections.
When it comes to fraud …
Winner: Credit cards
As far as fraud protection goes, hands down credit cards offer better protection. For starters, with credit card fraud, the thief doesn’t have direct access to your bank account as they would with your debit card, and therefore won’t be able to spend any actual cash that’s currently in your account for quick access. Additionally, most credit cards these days come with zero liability policies, meaning you won’t be responsible for any fraudulent charges made on your card. With debit cards, however, you may be liable for some of your charges. For example, if you report the loss more than two business days after you learn about it, but less than 60 days after your statement is sent, you could be charged up to $500 of the stolen cash. Check here for more information on debit card conditions regarding fraud.
[Why You Should Avoid Using Your Debit Card at Merchants]
When it comes to added incentives …
Winner: Credit cards
Debit cards rarely (if ever) offer added bonuses for their use, while credit cards come with all kinds of perks these days.
It is easy to earn cash back on your purchases with credit cards. For example, one of the best cards in the market lets you earn 2% on all of your spend if you make your payment on time and in full every month. Other credit cards help you earn even higher amounts in categories like grocery stores, gas stations or travel. You can find the best cash back credit cards here. These rewards only make sense if you pay your balance in full and on time every month.
Check out this piece for a list of good cash back and reward credit card options.
At the end of the day, deciding whether to use a debit or credit card will be a personal decision you have to make based on what makes you more comfortable — but understanding some of the key ways in which the two differ will certainly help you make the educated choice.