Using a credit card is better than using a debit card — as long as you practice financial discipline and spend within your means. Here’s why.
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Credit card debt is something you should avoid — with rare exceptions — but that doesn’t mean that you should avoid using credit cards. In fact, there are a number of benefits to using them, including the chance to build your credit profile, and the opportunity to earn valuable rewards.
The important thing is to use your credit card as if it were a debit card. That means not spending more money than you have, and not carrying a balance month-to-month by just paying the minimum amount or only part of your balance, which incurs interest fees the next month. Instead, you should pay the balance off in full every month, which not only helps you avoid interest, but also means that you don’t end up overspending and winding up in debt.
So why not just use your debit card to keep everything easier? There are actually a few reasons. Read on below to see exactly why you should use a credit card instead.
Credit cards offer more robust fraud protection, and offer a degree of separation from your checking account, which serves as an added safety measure.
Debit cards are connected directly to your checking account. Whenever you make a purchase — whether that purchase is processed as credit or as debit — funds are drawn immediately from that account and transferred to the merchant. In that way, it’s like an electronic check.
If a thief gets hold of your card — either the physical card, or just lifts your information off of it — and goes on a spending spree or makes a withdrawal, you lose the cash that the person spends. That means money disappearing from your checking account. If you had a set amount in there earmarked for things like utilities, rent, tuition, or something else, you won’t have access to that money. While most banks and debit card processors offer at least basic fraud protection, if not more, you may not get the cash back right away, particularly if it takes a long investigation.
With a credit card, however, money in your bank account isn’t touched until you pay your statement. If someone steals your number and makes fraudulent charges, you can flag them for the card issuer, and you won’t have to pay them — the card will be frozen — pending an investigation into the fraud. You don’t have to worry about losing cash and everything associated with that, like paying rent.
Although rewards debit cards used to exist, the Durbin amendment to the Dodd-Frank consumer protection act passed in 2010 limits the fees that banks can charge merchants to process debit cards. Consequently, consumer use of debit cards at retailers is less profitable to card issuers, so those issuers have less reason to incentivize consumers to use them.
Credit cards, however, remain profitable to banks, so they’ve invested more heavily in offering consumers a cut of those merchant fees in the form of rewards. Cards like the Chase Sapphire Preferred offer 2x points on travel and dining and 1x point on everything else, while the Freedom Unlimited offers 1.5% cash back on all purchases. Between those, and high sign-up bonuses — the Sapphire Preferred offers 50,000 points when you spend $4,000 within three months, and the Freedom Unlimited offers $150 back after spending $500 in the same timeframe — you can get lucrative rewards when you use credit cards instead.
Just make sure to always pay off your full balance so that you don’t end up in credit card debt, or paying interest. Even with a low APR, the costs of interest fees will more than outweigh any rewards you can earn.
Just about every adult has a credit profile, which is kept by credit reporting bureaus. This profile contains information about every loan you’ve applied for, held, and paid. All of that information makes up your credit score, which is a numerical representation of your credit profile.
Your credit score is positively affected by things that show a history of using credit responsibly, such as a history of on-time payments, having held multiple accounts, not having too much debt, and having held access to credit for a long period of time. On the other hand, it’s negatively affected by things like missing a payment or being late, or not having much history of holding credit.
When you use and pay a credit card every month, that adds another positive data point to your credit profile, which, in turn, helps build and raise your credit score. When it comes time to apply for a major loan like for a car or a mortgage, you’ll be more likely to be approved at a low interest rate if you have a positive credit history. Using a debit card, on the other hand, doesn’t affect your credit history at all.
You can read more about how using a credit card — responsibly — affects your credit profile and score here .
Many credit cards offer certain purchase and travel protections. For example, the Chase Sapphire Preferred, which we looked at above, offers robust coverage, such as trip delay insurance — that covers your costs for things like hotels, clothing, food, and toiletries for up to $500 per person if your flight or other travel is delayed overnight, or more than 12 hours during the day.
Another offering is purchase protections — if something you buy is damaged, lost, stolen, or otherwise made unusable within 120 days of buying it, you’ll be covered for up to $500 per claim, as long as you used the card to buy it. The card also comes with extended warranty protection, which offers an extra year of coverage on eligible purchases that come with a manufacturer’s warranty of three years or less.
Debit cards generally don’t offer similar protections — that means that you’re better off using a credit card for your major purchases and travel.
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