Imagine you’re standing in the grocery store checkout line and you don’t have enough cash to pay for all your items. You decide to take out a card but hesitate. Which card do you use to pay?
Many people do not consider the pros and cons of using debit vs credit cards when making a purchase. To know which is best to use in a given situation, you must first understand the differences between debit and credit.
Debit vs Credit: What You Need to Know
The way credit cards work is pretty simple: the cardholder purchases an item, which is paid for by the bank. The cardholder then pays the bank either in full or in installments during each monthly billing cycle for the total amount charged on the credit card.
Most credit cards have varying interest fees and occasionally a membership fee as well. Paying for something on a credit card is like taking out a loan — the bank gives you enough money to pay for it, and you agree to pay the bank back for the entire amount.
If you pay off your entire credit card statement each month, then you won’t have to worry about paying interest as well. But if you only pay the minimum amount required each month, you will end up paying interest on your purchases down the road.
To avoid accruing credit card debt down the road, be sure to budget out regular credit card payment to help you pay your purchases.
Debit cards, on the other hand, do not work like loans. Instead, they work like traditional paper checks. There must be enough money in your checking account, which is connected to your debit card, to cover the cost of the purchase. Otherwise, the payment cannot be processed.
If you don’t have enough money in your checking account to cover your purchase, you run the risk of racking up overdraft fees.
Debit cards nearly always utilize a Personal Identification Number, or PIN. Your PIN is usually four-digit code and acts like a personal signature. Once you enter your PIN you can pay for your goods and complete your transaction.
Your PIN also lets you withdraw money from ATMs or other places that allow cash withdrawals, like checkout counters at grocery stores.
Debit cards are automatically issued by your bank, so long as you open a checking account with them. Be sure to read the fine print and become familiar with any hidden bank fees attached to your debit card or checking accounts.
Credit or Debit? When to Use Your Cards
No one likes carrying around debt. However, it’s important to accumulate some debt by making purchases on your credit card in order to establish a payment history and credit score.
But that doesn’t mean you should use your credit card for everything. In fact, many items should explicitly not be put on credit. Even if your credit card company has great travel rewards or cash back perks, you should use your credit card wisely.
Here are a few tips to keep in mind when weighing the pros and cons of debit vs credit.
DO use your credit card…
- If you’re purchasing airline, bus, or train tickets, or booking a hotel room
- If you’re putting a down payment on a rental item, like a party venue or car
- If you’re paying for large expenses or a big-ticket item like a sofa or television
- If it’s an emergency, like being stranded in the middle of nowhere
Ultimately, it’s best to use your credit card for travel purposes, large purchases, or emergencies. You’ll have more breathing room for paying off these expenses and can budget accordingly.
If you’re traveling overseas, be sure to look up transaction fees from your lender. Or consider getting traveler’s checks for your trip to avoid paying such fees.
DO NOT use your credit card…
- If you’re purchasing a small one-off item like a cup of coffee
- If you have no cash to cover credit card payments later on
- For daily or weekly purchases like groceries or gas
A good spending habit to maintain is using your debit card when it comes to small purchases or regular expenses. This will help you budget better and figure out how much cash you should always have available in the long run.
Before making any type of purchase, ask yourself “will I have enough money to cover this?” This will help choose between debit vs credit for any given purchase. Whatever you put on your credit card will have to be paid back sooner or later. And anything paid for with a debit card you must be able to cover with the money you currently have in your checking account.
By keeping these tips in mind, you’ll always know which piece of plastic to take out in a given situation. And you’ll never hesitate when someone asks you “credit or debit?” at the checkout counter again.
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