Using Credit And Debit Cards Strategically
When you’re at the cash register preparing to pay for a purchase, you may ask yourself whether you should use your credit or debit card. Both credit and debit cards have their respective benefits, and learning how to best utilize these gains can put you in a good financial position.
There are several factors you may consider when making the choice, such as your financial goals, the protections afforded by each product and how your decision will affect your credit score ratings.
1. Are You Trying To Save Money?
If your goal is to limit your spending and stick to a household budget, relying on a debit card may be the best decision. This is primarily because you will not run the risk of incurring interest charges if you can’t pay your credit card balance in full.
In addition, debit cards are tied directly to your checking account, which may prompt you to stick to a money management plan and discourage you from overspending, according to CBS MoneyWatch. Paying with a debit card is also a hassle-free way to shop because you don’t have to worry about setting payment reminders to pay off your balance at the end of the month.
2. Are You Worried About Fraud?
While debit cards can be a beneficial way to avoid interest or fees, they typically lack the protection from fraudulent activity that credit cards feature. When your credit card is lost or stolen, you can contact your issuer and dispute charges that were made fraudulently, which will absolve you from being forced to pay for the illegitimate activity, the New York Times explains.
While you may dispute fraudulent activity on debit cards as well, the money is immediately taken out of your account and it may take investigators a longer period of time to replace the cash. In the meantime, you may be faced with insufficient funds or bounced checks.
3. What Are Your Credit Goals?
Purchases made with debit cards have no bearing on your credit standing, while the opposite holds true for credit card activity. If you are trying to build or rebuild your credit standing, it may make sense to make small purchases with your credit card and pay off the balance in full immediately to boost your score.
In contrast, if your credit standing is suffering due to missed or late payments or large balances, it may be best to pay with your debit card while you try to get a handle on your credit account.
4. Do You Need Immediate Access To Funds?
You can make reservations with both debit and credit cards. However, if you need immediate access to your funds, it may be in your best interest to rely on a credit card. When you make a reservation for a hotel, flight or auto rental, the money is not automatically removed from your account. Instead, a hold for the amount is placed on your account, essentially freezing those funds. This can be confusing for debit card holders and limit access to their accounts. In addition, if they forget about the hold, they run the risk of overspending and overdrawing their accounts once the funds are deducted.
Debit and credit cards have their own benefits and caveats, and the best way to manage them is to determine how each product corresponds with your goals. Some products may be better suited for certain purchases than others, and understanding the reasons behind these scenarios can be a great way to keep your finances and credit standing healthy.