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Financial Education

Credit Vs. Debit: Which Card Is Best?

A credit and a debit card on a table.
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Would you like to pay with credit or debit? A 2016 U.S. Consumer Payment Study found 40 percent of customers preferred paying with a credit card, while 35 percent opted for debit card payment. The question is: Does it make a difference?

A credit or debit card gives you the freedom and peace of mind of knowing you never have to carry cash. But they are not the same. Each option comes with its own unique advantages and disadvantages.

Major Differences Between Credit And Debit Cards

When you make a credit card purchase, you’re borrowing money from the lender/issuer of the card (i.e., the credit union), who in turn pays the merchant. Your credit card limit is also called your line of credit, and it’s a number that’s established by the lending company. This figure is based on your credit history, preference (yes, you can set your limit or ask for your limit to be raised or lowered), and/or the amount of money you deposited to cover the charges (in the case of prepaid credit cards).

The charge for borrowing (using a credit card) is called interest. The interest attached to the credit card varies greatly depending on the arrangement you made when you applied for your card. If you pay the balance in full within a prearranged timeframe, typically 30 days, there are generally no interest charges. Doing so will also help you build a strong credit score, which is critical if you plan to use credit for future purchases, or to apply for a loan (to pay for college, a home, a car, or renovations). Good credit can be attained by paying your bills in a timely manner, not carrying debt forward on your accounts, and monitoring your credit report; but a number of other factors can come into play, including the life cycle of your credit history, applications for new credit, and how close you are to your credit limit.

Your debit card activity has no impact on your credit score. On debit card purchases, the money spent is simply deducted from your bank account (typically a checking account). A hold is put on the purchase amount by your bank and the money that’s placed on hold pays the merchant in a process that can take anywhere from a few hours to several days. If you spend more than what you have in the account, you’ll likely get hit with an overdraft fee, which can add up at an average rate of $37 each time it happens. In 2016, Americans paid more than $15 billion in overdraft fees.

In most cases, debit card transactions don’t incur any charges if you have sufficient funds to cover your purchases. It’s actually very similar to writing a check. The major advantage to using a debit card instead of a check is that it’s much quicker and you never have to worry about holding up a checkout line.

Choosing The Best Card For Each Transaction

Debit cards have no interest charges and you always know where you stand just by tracking your purchases with receipts, keeping a written log or following your bank account activity online. You can easily transfer funds from your checking to savings accounts with no fees. Cash is always available through ATMs or by requesting cash back at participating merchants.

Unfortunately, in the case of fraudulent purchases or disputes with retailers, debit card refunds are often harder to receive than those on credit cards. Lost or stolen debit cards reported more than two business days after learning of the loss or theft, but less than 60 calendar days after receiving the statement containing the fraudulent transactions, can make you liable for up to $500 in false charges. If you report the fraudulent activity more than 60 days after receiving your statement, you’re liable for every dollar spent and all fees incurred.

The most highly-rated credit cards have a variety of perks including points, rewards and cash-back rewards for every dollar you charge on them. Consumers often use different cards based on personal needs such as travel discounts or gas price reductions. If your credit card is lost or stolen, you are only liable for a maximum of up to $50 in fraudulent purchases in most cases, and refunds are easier than with a debit card.

Most credit cards won’t prevent you from overspending. If you’re not careful, overspending and not being timely with payments could damage your credit score. In the most serious cases, it could harm your ability to make future purchases as you could be viewed as a credit risk.

The decision as to which type of plastic is best for you ultimately depends on individual preference and the transaction. If greater security, various rewards and building a credit rating are important to you, then using a credit card is likely the best option. However, if you want to be sure to limit your spending to whatever is in your account, then a debit card transaction is ideal. When it comes to convenience, a strong case can be made to carry both.

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CUNA 2023 diamond award trophy icon

CUNA 2023 Diamond Award Winner

Financial Education

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