Using Credit Vs. Debit

Credit cards and debit cards both have their advantages and disadvantages. To determine which one is best for you, you should consider your spending habits, budgeting goals, level of discipline and financial situation. Neither is likely to emerge as a clear-cut winner, and you may conclude you need to use a combination of the two.

Budgeting

Some people may prefer the restrictions of debit, because it limits the amount of money you can spend to what you have in your account. However, you may still pay money in overdraft fees, which can quickly add up, if you go over your available balance. Credit cards can be more forgiving when it comes to expenditure, especially because they offer a grace period, but those perks often come at a higher price. If you carry a balance on your credit card, you pay an interest rate, and the balance can balloon if it is not paid down sufficiently each month.

Protection

Credit cards generally offer more fraud protection than debit cards. With credit cards, your liability in the event of a fraud is capped at $50, and credit card companies often will not charge anything if you report the fraud immediately. Your liability can be up to $500 or more with a debit card, depending on how quickly you report the incident. Also, banks can take between 10 and 90 days (under special circumstances) to conclude their investigations, putting you at a financial standstill until your debit card account is credited with the stolen charges. With a credit card you can suspend unprocessed payments and avoid further financial hassles.

Rewards

Credit cards offer better rewards, though you still have to be disciplined regarding when you use them. To make the most of your rewards program, you should try to pay your balance in full each month to avoid having the rewards benefits negated by interest payments.

Credit Score

Using credit can help you build your credit score, whereas using debit has no impact on your score. Payment history affects 35 percent of your credit score, which makes it the most significant factor. When you use your credit card and make the payments regularly, you help build this score. However, irresponsible use of your credit card could cause significant damage to your credit score. If you carry a balance on your card, it could lead you to pay more for your purchases, and it also increases your credit-utilization ratio, which is the percentage of your credit limit being used and hurts your credit score if it is high.