Have you ever considered the benefits of using credit and debit cards? You almost certainly have both cards in your wallet right now, and you’re given the option to select one of them—sometimes in a matter of seconds—every time you make a purchase. You still have doubts about whether you’re making the best decision… and the same question pops into your head every time you make a purchase: “Should I use a credit card or a debit card?”
Uncertainty about the distinction between a credit card and a debit card, or when to use either, is a common quandary. The better you understand the benefits of each—beyond the fact that they provide a way to access money without carrying cash or a checkbook—the more savvy a spender you’ll become.
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Managing a bank account balance vs revolving credit
Credit cards and debit cards are both convenient ways to pay for things, but they operate in very different ways behind the scenes. As a result, according to Lou Haverty, financial analyst and founder of Financial Analyst Insider, they each appeal to different types of consumers.
Credit cards are a type of revolving credit. When you use your credit card, you are borrowing, and you pay interest if you carry a balance, according to Haverty. A debit card, on the other hand, is linked to a bank account usually, a checking account, and the money is withdrawn as soon as the transaction is completed, typically with the use of a PIN.
The difference between credit and debit cards is that the amount you can spend on a credit card is determined by your credit limit and the current balance on the card, according to Haverty. You can charge an additional $400 if you have a $1,000 credit limit and a $600 balance from previous purchases. If you’ve reached your credit limit, you won’t be able to use the card again until you pay off at least a portion of the outstanding balance. Every month, you need to make a minimum payment.
When deciding between a credit card and a debit card, keep in mind that most credit cards charge interest expressed as an annual percentage rate (APR), which is essentially what you pay to borrow. If you carry the balance from month to month, you will have to pay interest on the $600 balance mentioned above. Haverty says credit cards require a responsible approach to personal finances, even though they let you spend more than you have in your bank account.
The difference between credit cards and debit cards is that funds are drawn directly from the balance in the checking account to which the card is linked with a debit card. In a traditional account, you can’t spend more than what’s in the account, which reduces the possibility of incurring debt. If your account has overdraft protection, you may be able to spend more than your account balance by transferring funds from another, linked bank account.
When should I use credit rather than debit?
While it’s natural to consider credit card vs. debit card, there are some situations in which either a debit card or a credit card may be appropriate, depending on your financial needs and goals. How to choose between credit and debit when using a credit card?” follow the below guide:
If…, use your debit card.
You’ve never used a credit card before. Until you are confident that you have the discipline to control your spending with a card, a debit card may be the way to go, as it is a great tool for ensuring you do not charge more than you can afford. The benefit of debit cards for everyday budgeted purchases is the direct withdrawal from your bank account,” explains Stallworth. You are in debt that you are unable to repay. When should I use my credit card rather than my debit card?
Stallworth says a debit card should be your “go-to” card if you’re having trouble managing your finances or getting out of debt. If you keep charging, you’ll never pay off your debt.”You require cash at the register. If you still prefer to carry cash in your wallet, consider the following distinction between credit cards and debit cards: When you pay with a debit card, most retailers will give you cash at the register. The rate of cash advance fees on credit cards will almost certainly increase if the feature is available, says Haverty.