Both credit cards and debit cards are just smaller, plastic rectangles to replace larger, paper rectangles for payment, right? But what is the difference between them? They are both issued by banks. They both require a merchant to be accepting that brand of card. However, the biggest difference is the fact that, to use a debit card, you need to have the funds in your bank account to be able to use the card (using a debit card pulls funds directly from your bank account), while a credit card uses borrowed funds to pay for items. For example, if you made a $100 purchase with your debit card, that money would leave your bank account immediately (or within a couple days depending on the day it was used with weekends and holidays). On the other hand, the use of a credit card does not lead to your account losing money immediately. The money used on your credit card will only leave your account when you pay your credit card bill/statement, similar to other bills such as internet, phone, utilities, etc. Additionally, you may only have to pay a small amount of your overall credit card bill, with the remaining amount accruing interest.
Overall, a debit card requires you to pay for an item at the same time as buying it, while a credit card allows a user to buy an item and then pay for it at a later date.
So, knowing the definitions, we can take a deeper dive into several pros and cons of each type of payment card.
| Debit Card | Credit Card |
| Only use the money you have | Able to spend more than you have |
| Less or no reward points | More rewards points |
| Less fraud protection | Fraud protection |
| No credit benefits | Build credit score |
The biggest advantage of a debit card is it doesn’t allow you to overspend. With a debit card, you can only spend up to the amount you have in your bank account. While it could still allow someone to spend more than they should, it doesn’t lead to more than they have. However, a credit card could allow someone to spend far more money than they have in their bank account. This could get extremely expensive, as well as stressful, with the interest on credit card debt being extremely high. The most recent average credit card interest rate at the end of 2022, according to ABC News, was 21.6%. For example: if you put a large charge on a credit card of $1000, each month that this amount of debt is on your account will add roughly $18 to your dues (depending on length of month). Even if $18 doesn’t seem like much to you, think about that adding up to $216 over the year! Not to mention any extra purchases you made because “it was with a credit card”!
However, on the flip side, being able to spend more than you have with a credit card can be a life saver in certain situations. For example, if you have a bill due on Wednesday of a week and your paycheck hits Friday, a debit card would not allow you to pay that bill. Or say you only have a few hundred dollars saved up, but an emergency such as a car accident, health problem, house issue, or any other spur of the moment, unseen emergency requires more money than you have. A credit card could allow you to take care of the emergency and still be able to fix any issues.
But, you will still end up with credit card debt at a high interest rate, so whenever possible, avoid spending more than you can pay with a credit card!
Now onto the most fun benefit of credit cards: REWARDS!!!! Compared to debit cards, many of which don’t offer any rewards, credit cards tend to offer varying amounts of rewards depending on the card. For example, one of my favorite cards, the Discover Cash Back card, has a fairly unique benefit: each quarter, there is a different market segment where you get 5% cashback! Currently, it is grocery stores, drug stores, and select streaming services. Therefore, everytime I go to get groceries, I get 5% cashback for normal, everyday purchases there! So buying $100 of purchases I’d have to make regardless, I get $5. It doesn’t seem like much, but it does add up over time! Additionally, this card offers 1% cash back on all other purchases outside of the quarterly 5% cash back specials. Now, a lot of other cards can beat the 1% cash back on normal purchases, so potentially using multiple different cards can maximize your rewards.
However, this can become stressful and time consuming, so it’s important to figure out the best way for you to maximize your credit card rewards.
Onto an overlooked benefit of credit cards: fraud protection. Now this may vary by card, but overall, credit cards tend to have much more protection for fraud, whether that be digital, a stolen card, or any other form of fraud or theft. While the security behind each card might be similar, there is one big aspect that makes credit cards better: with a debit card, any stolen money was YOUR money.
With a credit card, it was the bank or card issuer’s money that was stolen, giving them more incentive to fight for it.
Finally, the most important benefit of credit cards in my opinion: building your credit score! A credit score is so important throughout life, whether it’s purchasing a home, a car, being screened as a renter, and so much more! Having a credit card allows you to build your credit score, which then allows you to be seen as trustworthy to banks and creditors for lending money to. A debit card does not allow someone to grow their credit history. But there’s a downside: if you don’t make on time payments, your credit will actually be worse! So make sure you have figured out how to make payments on time and be a responsible spender before getting that first credit score!
Now, after seeing the (very top level) comparison between debit and credit cards above, you may be thinking: “Well, it sure seems like credit cards are the better option!” And I’d agree, with one caveat: YOU NEED TO KNOW YOURSELF!!! If you still have the tendency to overspend and buy things you don’t need, stick to a debit card for now. I like to think that a good personal plan (one that I personally went with) was to open a bank account with a debit card when I first started working, and after making sure that I was able to consistently budget and make sure to spend less (ideally, a LOT less) than I had, finally proceeding to open my first credit card in order to start my credit score journey. Now, this will be different for everyone depending on your situation, but there are a lot of different ways to build credit. For example, student loans allow you to start a credit history for yourself. Or if you’d like to give your child a boost, you can put them on your credit card to help them get a start on their credit journey.
But most importantly, do your own research and know yourself and what will be best for you! Starting a credit card just to start building credit is useless if you know you will immediately start racking up unnecessary credit debt!
To summarize my thoughts on your journey away from cash:
- Get a debit card
- Gain experience in using the debit card, understanding your own spending psychology to make sure you don’t overspend
- After making sure you can manage a debit card responsibly, look into getting a beginners credit card, ideally with no annual fee
- Track your spending on the credit card, and always pay everything off at the end of the month (in emergencies, at least be sure to pay off the minimum payment)