This is by far the longest article I’ve posted, but I think it’s well worth reading. Recently, I’ve noticed increased attention to the use of debit vs. credit cards in online personal finance articles. So, here’s my two cents.
Valid arguments exist when examining the pros and cons of each. For me, it’s a credit card all the way. But this course of action only came after years of budgeting and saving.
I began with a debit card. This is probably the best approach when you’re starting out. Once you get the hang of successfully managing your finances and have established a good credit score, you can easily get a credit card and then use either, depending on the purchase. I’m now comfortable paying for almost everything with my credit cards and taking advantage of the associated perks. However, as mentioned above, advantages and disadvantages exist for either decision.
The Pros of Using a Credit Card
You do not need to carry a lot of cash.
Credit cards have added features like cash rewards and travel benefits. By charging almost everything on my credit card, I accumulate large amounts of cash rewards. Most years, I earn enough to purchase all of my Christmas gifts.
Using a credit card wisely improves your credit score.
Placing a charge on a credit card can give you more time to accumulate funds for a major purchase. However, the only time this is an advantage is when you know you’ll have the funds when payment is due.
You can pay off a higher interest card with one that has a zero-interest introductory offer. It’s important to be careful not to go overboard with this benefit. Opening too many cards in a short period of time will negatively affect your credit score.
Credit cards provide added protection against theft and fraud. And laws are in place that limit the amount of liability you incur when these instances occur.
Applying for a secured credit card can help when trying to establish credit.
The Cons of Using a Credit Card
There’s truth to the saying “Cash is king.” When you use a credit or debit card for everything, it’s easy to get into the habit of not carrying much cash. I’m guilty of this and have often traveled out of state without a sufficient amount of cash on hand to address situations where cash is the better or only option.
Fees are charged to withdraw cash.
Credit cards often impose an annual fee.
High credit card balances can affect your credit score.
Interest charged against credit card balances can be daunting. It’s often as high as 20% or more.
The Pros of Using a Debit Card
You can’t spend what you don’t have.
Using a debit card encourages you to stick to your budget
No cash advance fee is imposed when withdrawing cash from your account.
There is no annual fee for debit card usage.
You cannot accumulate high debt.
Your credit score is not considered when you apply for a debit card.
Use of debit cards is more flexible, whereas merchants don’t accept certain credit cards because of attached fees.
You can conveniently avoid a trip to the bank by accessing funds from an ATM.
You are tasked to think twice about buying something if you are required to pay when making a purchase instead of having the ability to delay payment.
You are encouraged to save for large expenses instead of putting them on a credit card and having to worry about payment at a later time.
No interest is charged when using a debit card because you’re spending your own money.
The Cons of Using a Debit Card
A hold may be placed on your account to protect against unexpected charges when you rent a car or check into a hotel.
Use of a debit card does not improve your credit score.
If you’ve reached your daily purchase limit, your debit card can be declined even if you have cash in your account
Funds are deducted from your account until issues of fraud or other types of errors are resolved.
While debit cards have also begun to offer rewards and other benefits, many times they are not as widespread or flexible as credit card offers.
As you can see, you should take several things into consideration when deciding whether to use credit or debit cards. These days, Americans collectively struggle to pay off approximately $1.14 trillion in credit card debt. Approximately 9% of credit card payments are seriously delinquent (behind 90 days or more) and roughly 20% of credit card users have maxed out their cards. These delinquencies are especially prevalent among Millennials and Gen Zs who are struggling with added student loan debt.
A young friend told me about an incident that occurred years ago when she was in college. Apparently, Bank of America penalized her for paying for groceries with her credit card, stating using the card for ‘necessities’ was a red flag. From that point on, she paid her normal bills through direct bank account withdrawal or a debit card.
I’m fairly certain this penalty would not occur today as times change; however, I believe the point was to caution young people at the beginning stages of learning how to manage their personal finances and establish a good credit score. When first starting out, it’s important to practice budgeting with discipline. The best approach is to carefully match expenses with income and avoid adopting a ‘buy now, pay later’ mentality. You can afford to practice more flexibility once you’ve mastered the budgeting process.
While my preference is to pay all of my expenses with a credit card, it’s a good idea to have at least one of each. The best tactic is to determine optimal card usage when paying bills or making purchases. Be smart, know yourself and your limitations, and use all of your cards wisely.
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