Both credit cards and debit cards offer the convenience of making purchases online or in person without carrying around wads of cash. However, there are significant differences in these cards, making your decision about which to use an important one.
Credit Cards
Credit cards allow you to borrow funds and pay back the balance within a designated grace period (usually a month) without interest. At the end of the grace period, if you don’t pay off the full amount, you’ll be charged interest.
Pros:
- Borrowing from the issuer allows you to make purchases now and pay for them later and if you pay your balance within the grace period this loan is interest-free.
- By opening up a credit card you are building a credit history and boosting your credit score, which is essential for making bigger purchases such as cars and homes.
- Credit cards are protected from fraud by the Fair Credit Billing Act (FCBA), which limits your liability to $50 if your card is lost or stolen.
- Credit cards offer valuable rewards, benefits, and services such and airline miles, points, user privileges, cash-back rewards, buyer protection, extended warranties, concierge services, travel insurance, and more.
Cons:
- If you’re not careful you could charge more debt than you can afford to pay off each month.
- When you don’t pay your balance each month you’ll owe interest on your balance.
Debit Cards
Instead of borrowing from the bank, when you swipe a debit card, the money is taken directly from your bank account.
Pro:
- Because debit cards draw directly from your account there is no risk of going into debt or accruing interest.
Cons:
- Debit cards do not help build your credit.
- Debit cards also typically don’t offer the same rewards, benefits, services, warranties, insurance or other cardholder privileges.
- Fraud protection for debit cards is more limited than for credit cards. Under the Electronic Funds Transfer Act (EFTA) you are not liable for charges made after you report your debit card lost or stolen. If you report within two days of the loss or thefy, you’re liable for up to $50. But if you wait more than 2 days you’re liable for up to $500 and if you wait more than 60 days from the date of your statement you are liable for the entire amount.
- You won’t be able to use your debit card to make travel reservations unless you have enough money in your account to cover the “holds” placed on funds by hotels and rental car agencies. Because the true amount of the charge is unknown until check-out or return of the vehicle, many hotels and rental car agencies won’t even accept debit cards.
Prepaid Debit Cards
Similar to debit cards, with a prepaid debit card you are not borrowing money from a bank. But unlike debit cards, they are not linked to your bank account. Instead, you pay the full amount in advance plus a fee. When you swipe a prepaid debit card, you are drawing down on the prepaid balance loaded onto the card.
Pro:
- Because the money is already paid there is no risk of going into debt by using the card.
Cons:
- Prepaid debit cards do not help build your credit.
- Prepaid debit cards do not offer rewards, points, services, warranties, or other cardholder privileges.
- Prepaid debit cards charge high fees. For example, it could cost $5 in fees to use a $25 prepaid card, resulting in a total of $30 being spent for a $25 purchase.
- Prepaid credit cards do not carry any loss or theft protection. If the card is lost or stolen, just like cash, there is no way to recover that loss from the issuer.
- Because the final amount of the charge is unknown until check-out or return of the vehicle, hotels and rental car agencies are unlikely to accept prepaid debit cards to hold a hotel or car rental reservation.
Whether you use cash, credit, debit, or a prepaid debit card be sure you know the pros and cons of each so that you’ll make the best possible decision when making a purchase.
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