Do you know when it’s a good time to use a debit card versus a credit card? Is there a difference?
If you’re just starting out on your financial journey or afraid of getting into debt trouble, you may be afraid of using a credit card to finance everyday expenses. On the other hand, you may have indulged your credit limit a little too much and now have to pay it off.
Either way, it’s a good idea to understand exactly how to use your debit cards and credit cards. When used unwisely, they have the potential to land you in hot water. But when used to your advantage, they can be powerful financial tools that allow you to better manage your money and make the most of rewards and other benefits.
How Do Debit Cards Work?
A debit card is connected to your bank account and is an electronic stand-in for physical cash. Instead of withdrawing paper money from the bank, you can use a debit card to make purchases electronically with funds from your account.
You can only use a debit card when there is money in your bank balance. If you try to use the card when you have a low or negative balance, you may be charged an overdraft fee by your bank. Since a debit card uses funds you already have to make purchases, you aren’t charged any interest when you use this card.
How Do Credit Cards Work?
Credit cards don’t represent money you already have in the bank, they represent money you’re borrowing from a financial institution. Credit cards come with limits on the amount you can borrow, which can range from hundreds to thousands of dollars.
If you don’t pay off your credit card each month, you’ll end up owing interest on the balance. This means credit cards can end up costing you, especially if you rack up a significant balance and aren’t able to pay it off promptly. That said, credit cards also often come with benefits for cardholders, including rewards points, cash back, travel perks, and more.
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When should you use a credit card vs. a debit card?
If you’re looking to build a history of responsible borrowing and earn rewards or cash back on your purchases, it makes sense to use a credit card if you know you’ll have the money required to pay off the balance at the end of the month.
By putting purchases on a credit card and paying off the balance before it accumulates interest, you can take advantage of your credit card’s benefits with very few of the downsides. To maximize your earning potential and take advantage of luxury perks and benefits, there are plenty of high-tier rewards credit cards available. Keep in mind credit cards usually also come with an annual fee. On the other hand, simple, fee-free cards that earn a little extra on your purchases are also available, and usually without an annual fee.
Credit cards are also a great fit for online shopping since they often offer better fraud protection than debit cards. If someone steals your credit card information and tries to make a purchase using it, credit card companies will usually reimburse you for the expense when you file a claim. It may be more difficult to get your cash back if your debit card information is stolen.
That said, using a credit card for everyday purchases isn’t the best fit for everyone. If you rack up a significant balance, it can be difficult to afford monthly minimum payments and pay down your debt. It may also be easy to overspend using a credit card, even if you don’t have the cash on hand to pay it off.
If you’re worried about using a credit card responsibly while still building a history of good credit, you might want to consider a secured credit card, which requires a security deposit equal to the spending limit you receive. The security deposit protects the credit card company from losing money if you aren’t able to pay your bill.
Making your money work for you
One of the first steps toward financial freedom is to pay down any outstanding debts, including costly credit card debt. If you’re already on top of your credit card payments and are using your cards to take advantage of rewards and benefits without accumulating interest, you’re on the right track. After building up an emergency fund, you should consider investing additional savings to make your money work for you and grow your wealth.
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