Either way, it’s a good idea to understand exactly how to use 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.
What is debit?
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 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.
What is credit?
Credit cards don’t represent money that you already have in the bank; instead, they represent money that you’re borrowing from a financial institution. Credit cards come with credit limits that limit the amount you can borrow, which can range from a few hundred to a few thousand dollars.
If you don’t pay off your credit card at the end of each month, you’ll end up owing interest on the balance. This means that 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.
When you should use a credit card vs. a debit card
If you’re looking to build up a history of responsible borrowing and earn rewards or cash back on your purchases, it makes sense to use a credit card in most instances, as long as 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 begins to accumulate interest, you can take advantage of many of the benefits of credit cards with very few of the downsides. If you’re looking to maximize your earning potential and take advantage of luxury perks and benefits, there are plenty of high-tier rewards credit cards on offer. On the other hand, if you’re looking for a simple, fee-free card that just earns you a little extra when you spend, there are some great simple cash back cards with no annual fee.
Credit cards are also a great fit for online shopping and other purchases made over the internet since they often offer better fraud protection than debit cards. If someone steals your credit card information and tries to make a purchase using your card, credit card companies will usually reimburse you for the expense when you file a claim, while it may be more difficult to get your cash back if they use a debit card.
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 can 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.
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 credit cards to take advantage of rewards and benefits without accumulating any interest, you’re on the right track. After building up an emergency fund, you should consider investing additional savings in order to make your money work for you and grow your wealth.
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