Debit or credit? That is a common question that you hear from the cashier when you are about to pay for your purchases. Even if you have given the same answer for years now, you may want to sit down and reconsider your payment choice. After all, smart spending is determined by your payment choice.
Some people will tell you that spending in cash is still the best way to pay for your needs. That is because you want to keep yourself from overspending. You do not want to suffer the consequences of debt because it can seriously compromise your ability to grow your personal net worth.
But what exactly is the payment choice of Americans? Is it cash, debit or credit? Based on an infographic published on NilsonReport.com, in 2007, $3.34 trillion expenses were paid in cash while $3.38 trillion were paid in cards. The same report stated that in 2017, it is expected that more people will prefer to use their cards. It will grow to be $7.10 trillion while cash spending will go down to $2.28 trillion.
We can assume that the reason for this is the convenience of using cards. You do not have to carry all that cash with you. Your wallet do not have to be too bulky. Not only that, cards provide an extra layer of protection compared to cash. When someone steals your money, you can say goodbye to it forever. But when your card is stolen, it has an automatic protection that will ensure that only you can use it. Of course, thieves are smarter now and they can probably break those protective measures but it will be a lot harder than cash.
Since cards are more appealing than buying through cash, the next question that you have to ask yourself is this: should you use debit or credit?
When should you use debit cards over credit?
So why should you choose to use debit cards over credit? Here are a couple of reasons why it is better than the other payment choice.
Debit cards keep you from overspending. A debit card is connected to your bank account. If it still has money, you can use your debit card for purchases. In some cases, bank allow you to spend even when you have insufficient funds but that will result in overdraft fees. It is typically high so most consumers make sure not to let this happen. If your monthly spending goes beyond your budget, then you know that a debit card is your best option.
Debit cards allow you to get actual cash. Another benefit is when a merchant only accepts cash, a debit card can give that to you. It can be done through an ATM or even through another cash register. As long as you have your PIN, you can get cash without any charges. If you do this with a credit card, you will be charged with interest and fees.
Debit cards protect your money. In terms of protection, debit or credit cards can keep your money safe. But the former seems to give more protection. Debit cards, even if they are technically cash from your bank is still protected from theft because a PIN is needed to use it. As mentioned that personal identification number is also required when using getting cash from ATMs. It is oftentimes difficult to duplicate a PIN so theft is more difficult to do. Based on some statistics found on CardHub.com, 85% of debit card transactions in 2011 that used a signature verification were done in fraud. This proves that credit cards that use signatures are also more in danger of identity theft.
Debit cards do not charge you will interest. Since you are technically using your money to make purchases, there are no interest rates to worry about. That means, you are not putting yourself in danger of acquiring too much debt amount. You are also ensuring yourself that you will only pay for the true cost of your purchases.
When is it wiser to use credit cards over debit?
Now let us go over the reasons why between a debit or credit card, you will choose the latter over the former.
Credit cards help you build up your credit score. According to a study published in 2012 on KansasCityFed.org, consumers who have a high credit score typically use credit cards instead of debit for purchases. While the high interest rate may scare you out of using it as a spending tool, you have to realize that debit cards will do nothing to influence your credit report. How can it do that when using it does not put you in debt? So if you want to build a good credit score, you need to opt for credit cards.
Credit cards allow you to buy big items without waiting. While this does not promote patience, you should realize that some big purchase items come at 0% interest. At least, this is true if you stick to the payment terms. As long as you pay your dues on time, buying through credit cards will not give you any problems.
Credit cards provide another source of emergency funds. You are still encouraged to save up a cash emergency fund. But there are situations wherein your need is so great that you end up needing more than that fund. This is where credit cards can be really beneficial. It allows you to dip your hands in additional funding to help you survive an unexpected event in your life.
Credit cards teach you credit management. Believe it or not, credit cards are not the culprit when it comes to debt. Sure it has high interest rates and all the other fees. But if you think about it, you will realize that the error is actually in the way we handle the card and the balance that we acquire through it. If we learn credit management, you do not have to fear credit card use. Through this purchasing tool, you get to learn how to manage debt – something that debit card will not give you the chance to learn.
How to choose the right card for your purchases
Choosing between debit or credit is actually more simple than you thought. All it really takes is understanding the details of each card and knowing the type of spending lifestyle you lead.
Simply put, a debit card will leave you less room to make mistakes. That is because you are relying on money that you currently have. On the other hand, a credit card may increase your chances of being in debt but it opens doors for you like having an emergency fund or a high credit scores.
Here are some important points to consider when you are deciding between debit or credit.
Can you control your spending? If not, then you should stick to using debit cards.
Do you always shop with a budget? If you do, then a foolproof budget plan can allow you to use your credit card and avoid overspending.
Does your credit card offer rewards? If there is a chance to gain rewards, then opt to use your card. The cash intended to be used from your debit should be transferred accordingly to pay for the credit before the due date.
Which has the lower fee? Take note of the fees of each card and understand which of them will cost you more in the end.
Knowing the right purchasing tool, debit or credit, is important to be wise about your expenses. Make sure you take time to understand your options so you know when one should be used over the other.