Debit and credit cards are both convenient forms of payment that shoppers often use interchangeably. However, there are crucial differences between these two types of plastic:
- Debit cards are essentially digital checkbooks that are tied directly to your bank. You can use these PIN-activated cards to withdraw money from ATMs. You can also buy products at checkout counters and through online shopping carts.
- Credit cards provide you with a short-term loan. Some are PIN-activated, allowing you to withdraw “borrowed” money from ATMs. However, most people use credit cards to buy products online or at brick-and-mortar stores. In addition, some credit cards require signatures to complete an in-person purchase, while others rely on PINs.
Due to these differences, there are certain pros and cons that come with using either of these popular payment methods. Let’s take a look.
The Advantages of Using Debit Cards
Because debit cards are tied directly to your bank account, you can’t really spend more than you have. This makes it impossible to fall into debt. Moreover, there aren’t many fees involved with debit card use — unless you withdraw money at an out-of-network ATM. You can even avoid these fees if you request “cash back” when making purchases at POS terminals.
There are two additional benefits of debit cards:
- Because debit cards provide easy access to cash, you can still do business with those who don’t accept plastic – i.e., landlords, street vendors and taxis.
- Almost all debit cards are PIN-activated, which offers more security than simply signing a receipt. After all, anyone can forge a signature.
However, there are some downsides.
The Disadvantages of Using Debit Cards
Because the money is tied directly to your bank, you could theoretically lose everything if someone steals your debit card, and there isn’t much liability protection.
According to the Electronic Funds Transfer Act, you have 48 hours to report the theft. After that, your liability increases to $500. If more than 60 days go by without you reporting anything, your bank won’t cover any of your losses.
That’s not to say there are no debit card security measures in place. Someone must first copy or steal your card number (or magstripe). That person must also know your PIN to start withdrawing money — so there’s at least some protection.
Another downside is that you can only spend what’s currently in your bank account. Although this is great for avoiding debt, it isn’t ideal when dealing with an emergency.
The Advantages of Using Credit Cards
The primary benefit of credit cards is that they act as a buffer between the outside world and your bank account. Your card could get lost or stolen, but your money stays safe.
Yet credit card security measures go even deeper than that, with many card-issuers offering zero liability protection. Even if someone racks up fraudulent charges, you’re not personally responsible. In fact, some banks will credit the stolen funds back to your account even before they start their investigations.
Credit cards also come with a range of perks, including:
- Cash back rewards and frequent flyer miles
- Automatic insurance for flights and rental cars
- Extended warranty protection for products
Though credit cards aren’t without their drawbacks.
The Disadvantages of Using Credit Cards
When you buy something with a credit card, you’re spending money you don’t necessarily have. Because that short-term loan carries interest, you end up spending even more money servicing this debt over time.
It’s easy for this situation to get out of hand. For households that carry a monthly balance, the average credit card debt is a staggering $16,000.
Nationwide, this card debt exceeds $1 trillion. In fact, it’s not uncommon for users to take out a second card to help pay off the first one.
Moreover, credit cards carry a lot of fees — especially if you miss a payment. Nonetheless, even with a card that delivers tons of “free” perks and benefits, there is still usually an annual membership fee.
Which Form of Plastic Is Best?
Because of the pros and cons of these two payment methods, there are scenarios in which debit cards are the better option, and there are cases where credit cards are the smarter choice.
When to Use a Debit Card
As a general rule, you should use debit cards if:
- You need access to quick cash – either via ATMs or cash registers.
- You are debt-averse and want to control your spending.
- You have poor credit and can’t qualify for a low-interest credit card.
When to Use a Credit Card
If you’re worried about fraud protection, credit cards are the way to go. They’re even more secure now that chip-enabled EMV plastic has become the norm. This is especially true of chip-and-PIN EMV cards that require personal identification numbers during in-store purchases.
Though when shopping online, credit cards aren’t inherently safer than their debit counterparts. Criminals can still intercept your account number and rack up fraudulent charges. However, credit cards do come with liability protection if this ever happens, so this makes them the more secure option for e-commerce.
In addition, EMV credit cards are accepted worldwide, making them the better choice when traveling abroad. By contrast, any debit cards you use will almost — by definition — be out of network, so you’ll rack up ATM fees every time you withdraw cash.
If you have a low credit score, it’s best to avoid credit cards as much as possible. Otherwise, you’ll pay exorbitant interest rates.
There are two exceptions to this rule:
- You’re 100 percent positive you can pay off the balance every month. If there is no debt on your card at the end of each billing cycle, the interest rate becomes irrelevant.
- You’re trying to beef up your credit score. Responsible use of your credit card is one of the fastest ways to erase past mistakes.
Have questions about debit card security or credit card acceptance? Schedule a free consultation with our payment team today.