Paying with Plastic - Credit vs Debit Cards

credit card vs debit card

Cash is king, right? Not anymore. When it comes to preferred payment method, Americans prefer plastic to paper. According to a 2014 online survey conducted by TSYS, 43% of those asked preferred debit cards, 35% credit cards, 9% cash and the remaining 13% preferred other payment methods. For many, the decision to pay with a card rather than cash comes down to the convenience of not having to carry around cash.

What’s the difference between a debit and credit card?

A debit card allows a customer to spend money they have by drawing on funds they have on deposit in their bank account.  Any purchase made with a debit card is immediately deducted from your checking account

A credit card allows a consumer to spend money by borrowing money from the card issuer up to their credit limit.  When you make a purchase with a credit card, the bank issuing the credit card pays the vendor, and then you have an obligation to pay the bank for the amount you “borrowed.” 

The main reason people avoid credit cards is to avoid getting into debt, as credit cards typically have high interest rates and fees that apply when you don’t pay the full amount due on your bill every month. If you are steadfast in paying your bill every month and never carry a balance, then a credit card is a better purchasing tool than a debit card for the following reasons:

Rewards & Benefits

Almost all credit cards offer rewards to consumers when they make a purchase. Depending on the card, rewards can be in the form of cash back, frequent flyer miles, gift cards, merchandise and more. You can even use your reward points to pay your bill. Some credit card issuers even offer consumers a reward bonus when they sign up for a card.

In addition, some banks offer credit cards with no foreign transaction fees, which typically range from 1% to 3%, depending on the card – a great feature for those that travel outside of the US. Many credit cards also extend the manufacturer’s warranty when an item is purchased on the card, a good option when purchasing electronics.

Fraud Protection

Most of the bigger credit card issuers and banks have instituted a zer0-liability policy on fraudulent credit card and debit card transaction, as long as they have been reported in a timely manner. If a fraudulent transaction is made with your credit card, there is no immediate financial loss to the cardholder while they report the fraud.

By contrast, if a fraudulent transaction is made with your debit card the money is already taken from your bank account. If the fraudulent activity draws down the balance in your account any checks written out or automatic bill payments could bounce, purchases will be declined and you won’t have access to the funds until the bank resolves the issue.

Building Credit

One of the most effective ways to build a good credit score is through the responsible use of credit cards. Making purchases with a credit card and making payments in full each month is a responsible way to develop a strong credit history and credit score. According to research by Credit Karma, consumers with at least one credit card have higher average credit scores than those who don’t have one.

For consumers, the benefits associated with credit cards such as rewards and benefits, fraud protection, and building credit makes credit cards the superior purchasing tool to debit cards. The one exception to this is when the consumer doesn’t make their full payment every month and carries a balance. The fees and interest of carrying a balance each month will almost always outweigh the benefits of using a credit card.