Note from the Editor: This is a periodic piece that will be updated regularly with any fresh information.
Both credit cards and debit cards share a similar appearance from the outside: Both include expiration dates, security codes, and numbers ranging from 15 to 16 digits.
But in point of fact, debit cards and credit cards are not the same things, and the world of finance is frequently divided as to which form of plastic is preferable for the end user. Although some experts in the financial industry are staunch supporters of debit cards (or cash), we at TPG believe that credit cards are a far superior alternative for your spending needs.
In this tutorial, we will explain how debit and credit cards function, as well as the three main reasons why we believe it is best to put your debit card aside and use a credit card instead whenever possible when making a purchase.
How credit and debit cards work in and of themselves
Debit cards are connected to the bank accounts that they are used with. When you purchase with your debit card, the money is taken out of your account immediately (or within a few days at the latest), depending on the type of transaction. Your bank will most likely refuse the transaction if you try to use your debit card to make a purchase that costs more money than you have put in your account at the time of the attempt.
On the other hand, using your credit card is comparable to having a portable and adaptable loan. You can borrow money (up to the limit of your credit), then repay it and borrow it again. You are free to carry out this procedure an unlimited number of times so long as your account is active and in good standing.
Your monthly statement will reflect the total amount of charges accrued from the use of your credit card over the billing cycle. It is up to you to decide whether to pay off the entire debt by the due date (which is strongly suggested) or to make at least the minimum payment towards the amount that you owe. Paying off the entire balance by the due date is strongly advised.
Credit cards might be intimidating for some people because they are afraid of getting into major financial difficulty as a result of their credit card debt. This is a reasonable issue given that the interest rates on credit cards are typically rather high and can quickly add up to a significant amount of money. You should make every effort to stay away from credit card debt, but if you use your credit cards responsibly, you may still enjoy the many benefits that come with having credit cards.
Related: The 10 commandments of credit card usage from The Points Guy
Credit cards provide superior protection against fraud.
Putting aside points and miles for a time — just for a second — the most valuable benefit that comes with credit cards is the protection that these bits of plastic (or metal) offer. This is the biggest perk that comes with credit cards.
To begin, using a credit card will shield you from financial responsibility for any fraudulent purchases. The federal government has your back if you misplace a card, have it stolen, and then discover that someone else has started making charges on the card.
The Fair Credit Billing Act (FCBA) places a cap of $50 on the amount of responsibility you have if your credit card is used fraudulently (and most major card issuers waive even this responsibility as a matter of policy). If you make sure to notify the unlawful transaction within sixty days of the date that it appeared on your account, you will be covered.
Because of the Electronic Funds Transfer Act, users of debit cards are also shielded from the possibility of fraudulent transactions (EFTA). If you fail to identify and disclose the issue within two business days of discovering it, however, your liability might escalate to up to $500. Additionally, the money in your bank account may be frozen while the bank investigates the fraud, which may provide a significant challenge for you if you have financial obligations that are approaching their due dates during this period.
If there is a problem with the products or services that you have purchased, another safeguard that comes with credit cards is that the card issuer may assist you in getting your money back. The FCBA should once more be thanked for providing this safeguard. Imagine that you placed an order for a product but you never got it. Naturally, you should first make an effort to negotiate a solution with the business owner. However, if the merchant refuses to assist you (which does happen), you have the option of disputing the charge with the card issuer.
If you made an identical purchase but used a debit card instead of a credit card, your bank is not required by law to take or investigate a dispute that you file. Under the terms of the EFTA, fraudulent charges made using your debit card are the sole sort of dispute that banks are required to examine.
Last but not least, additional benefits, such as purchase protection, extended warranties, and price protection, could be included with the use of your credit card. These benefits could come in handy if an item you buy breaks (or is lost), or if the price of an item you buy suddenly reduces. These wonderful perks are not included with every credit card, but they are virtually unheard of when it comes to debit cards.
Related: Some compelling arguments against making use of your debit card
Building your credit history with credit cards is helpful.
Another significant reason why we like credit cards over debit cards is that credit cards make it easier to establish and maintain a positive credit record. On the other hand, debit cards do not in any way contribute to an improvement in either your credit reports or credit ratings.
In most cases, credit card companies will report customer accounts to all three of the main credit bureaus (Equifax, TransUnion and Experian). Credit cards have the potential to assist you in the long run in constructing great credit ratings provided that you use them responsibly and make your monthly payments on time and in full. The longer you've had your credit cards and maintained a good payment history, the greater the beneficial impact they'll have on your credit score.
Related: six steps you can take to boost your credit score
Credit cards offer the opportunity to accumulate rewards.
Last but not least, one of the reasons we appreciate using credit cards is the incentives they offer. Credit card rewards can help achieve a variety of financial objectives, such as budgeting for a significant vacation or simply trying to set aside some cash.
We are big fans of the fact that it is possible to rack up rewards simply by using credit cards for the kinds of purchases one was planning on making anyhow. Although some credit cards come with an annual fee, the benefits nearly always surpass the added expense. On the other side, using a debit card will not often earn you any rewards of any kind for your participation.
If you want to begin putting together a strategy to earn credit card rewards from your everyday spending, TPG's beginner's guide to earning points and miles is a wonderful place to start. In this article, you'll learn all you need to know to get started collecting points and miles.
Bottom line
Credit cards, when used responsibly, are a better option for making purchases than debit cards; nonetheless, the most important consideration is to stay out of credit card debt.
There are a variety of convenient ways to monitor your spending, which can be helpful if you are concerned about charging more on a credit card than you will be able to afford to pay off. To establish spending objectives and ensure that they are met, you can use a specialized app for managing your finances, a note on your mobile device, or even a good old-fashioned pen and paper.
When you feel confident that you can make responsible use of credit cards, it's time to put away your debit card and start reaping the benefits of using credit cards instead.