Editor’s note: This is a recurring post, regularly updated with new information.
On the outside, credit cards and debit cards look a lot alike: Both have 16 digits, expiration dates and security codes on the back.
In reality, credit cards and debit cards are not the same, and there’s often debate in the financial world over which type of plastic is best for the consumer. Some financial pros are firmly in the pro-debit-card( or currency) camp, but here at TPG, we believe that credit cards are a much better choice for your spending.
In this guide, we’ll break down how debit and credit cards succeed and the three reasons why I think it’s better to keep your debit card in your pouch and repay with a credit card instead.
In This Post
Debit poster vs. credit cards: The machinists ( Photo by Atit Phetmuangtong/ EyeEm/ Getty Images)
Debit posters are tied to your bank account. When “youre using” your debit card to make a charge, the funds are withdrawn right away( or within a few dates) from your report. If you try to use your debit card for a purchase that costs more coin than “youve had” deposited, your bank will generally decline the transaction.
Your credit card , on the other hand, makes like a portable, resilient loan. You can borrow money( up to your credit limit ), pay it off and acquire again. You can repeat this process repeatedly as long as your accounting is open and in good standing.
As you use your credit cards through a billing cycle, your freights are tallied up on your monthly statement. It’s up to you whether to pay off your part balance by the due date( strongly recommended) or to make at least the minimum pay toward the amount you owe.
Related: TPG’s 10 commands for credit cards
People tend to avoid credit cards since you can get into serious financial trouble if you don’t manage your account well, overspend and allow yourself to get into debt, with expensive interest rewards tacked on regularly. Recognition placard obligation should indeed be avoided, but you’ll miss out on great benefits if you swear off credit cards altogether.
Here are the three reasonableness a credit card is a smarter choice than a debit card.
Ascribe placards offer better protection
Putting points and miles digression for a moment( just for a moment ), the best perk that comes from credit cards is the protection that those pieces of plastic( or metal) volunteer. When you use a credit card for your expend, it can protect you in three ways.
Credit cards protect you from drawback for fraudulent events . If you lose a card or it’s stolen and someone else starts accusing on it, the federal government has your back.
The Fair Credit Billing Act( FCBA ) restriction your drawback for fraudulent business on your credit card to just $50( and most major card issuers forfeit even these duties as a matter of program ). Simply report the unauthorized transaction within 60 epoches of your statement date and you’re covered.
Debit posters are protected from fraudulent deals, extremely, thanks to the Electronic Fund Transfer Act( EFTA ). However, your liability shoots up to $ 500 if you don’t catch and report the problem within two business epoches. Also, the money in your bank account can be tied up while the bank probes the scam, which could be a serious problem if you have legislations coming due in the meantime.
Another credit card protection starts if there’s a problem with the goods or services you bought: Your poster issuer might help you get your money back. This care is, once again, thanks to the FCBA. Imagine you required a produce but never received it. Of course, you should try to work things out with the seller first. But if the shopkeeper won’t help you( it happens ), you were able to quarrel the charge with your credit card issuer.
If you’d paid for the same purchase with a debit card, your bank isn’t legally obligated to make or probe legal disputes. The only type of dispute banks have to investigate under the EFTA is fraudulent accusations on your debit card.
Your credit card may also come with added benefits, including purchase protection, extended assurances, and price protection. These benefits might help you when an piece you are buying interrupts( or is lost) or when the price of an component you bought unexpectedly drops. Not every credit card offers these great benefits, but they’re practically unheard of with debit cards.
Credit-building potential ( Photo by cnythzl/ Getty Images)
I prefer credit cards to debit card for another important reason: My placards have helped me build a health credit sketch over the years. My debit card doesn’t help me improve my credit reports or ratings whatsoever.
Credit card issuers generally report accountings to all three major credit bureau — Equifax, TransUnion and Experian. As long as you administer your reports wisely( pay them on time and in full every month ), credit cards can help you build solid credit compositions over age. The older your credit cards become with a positive payment record, the more your credit orchestrate will benefit.
Rewards-earning possible Use your credit reinforces to book fabulous inns.( Photo courtesy of the JW Marriott Gold coast Resort)
Finally, I affection working my credit cards for obtains because of the rewards they volunteer. In the past six months alone, I payed and redeemed roughly $3,500 worth of free tour — all courtesy of my rewards credit cards.
Best of all, I didn’t have to devote any extra money to earn these wages. I expended my credit card to pay for buys I needed to make anyway. TPG’s beginner’s guide to earning phases and miles is a great place to start if you want to learn more about credit cards rewards.
If I had applied my debit card to cover my spending instead, I would have missed out on this great benefit. In general, exercising a debit card for purchases doesn’t give you anything in return.
When you use credit cards responsibly, they’re a smarter spend alternative than a debit card — with the major caveat of scaping credit card debt. Otherwise, the expensive interest fees you offer will wipe out the best interests of the any wages you earn.
Using a debit card( or currency) won’t stop you from overspending, even though it is might restraint the damage. But, it is possible to avoid overspending with your credit cards as well.
If you’re worried about charging more than you can afford to pay off on a credit cards, find a opportune way to move your spending. You can use a money management app, a tone on your telephone or even old-fashioned pen and paper to set spending aims and stick with them.
As soon as you trust yourself to use credit cards responsibly, it’s time to put away your debit card and start reaping some rewards.
Additional reporting by Stella Shon
Featured photo by Gary Friedman for Los Angeles Times via Getty Images
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