Some people use the terms "credit card" and "debit card" interchangeably, as if they are one in the same. However, there are big differences between these two types of cards, and those differences make one choice more favorable than the other in some situations. In this article, we will focus on the benefits of credit cards over debit cards so you can see what these plastic cards can do for you.
The Difference between Credit Cards and Debit Cards
In order to understand whether one card is better than the other, you have to know the differences between a credit card and a debit card. These include:
- The source of money: With credit cards, you get money from a creditor to pay back over time. With debit cards, you use your own money like you would if you wrote a check.
- The cost of using the card: While both cards typically have some fees, credit cards can be much more costly if you don't completely pay off the balance on time each month. Any balance carried from one month to the next will be subject to a financial penalty based on the card's interest rate.
- The option to build credit using a credit card
Credit cards and debit cards may look the same, but they are completely different. You have to determine which one is better for your use.
Benefits of Credit Cards over Debit Cards
Listed below are some common benefits you can enjoy from using a credit card.
Building Credit with Payments
Every time you make a payment on your credit card account, you improve your credit score. This is one of the easiest ways to build credit, especially for someone new to the credit market. It also provides you with a sense of accomplishment for paying off a debt. Granted, this can also hurt your credit over time, but only if you do not manage your money properly. If you can make timely payments, you will help build your credit standing.
Using Unsecured Money
With a debit card, you need to have the money in your checking account in order to access these funds, or else your transaction will be denied. With a credit card, you are utilizing the bank's money in the form of an unsecured loan. The bank grants you a certain line of credit and you can access that amount of money as a short-term loan. It is unsecured, meaning that you don't have to put up any collateral for that money. You just have to pay a high cost for using the money which is the card's interest rate.
The only exception to this rule is when it comes to secured credit cards, which are cards in which you put down an initial deposit so that you can have a line of credit. These cards help you build credit when you cannot qualify for a traditional card.
Having Back-up Money
Since the money on your credit card is not yours, you have the ability to tap into it in emergency situations. Most people don't have thousands of dollars sitting in their accounts to cover accidents and unexpected expenses. This is a nice benefit of credit cards. You can use the card to get back on your feet, and then pay it back when you have the money available. You just have to make sure you do, in fact, pay it off as quickly as possible to minimize the finance charges.
If you plan to travel, you may need a credit card to make your reservations. Some hotels, airlines and rental car companies may not allow you to use a debit card to hold your reservation. That is because a debit card is tied to a fixed account which is your checking account. It's always wise to have a credit card available for when you travel, even if you rarely use it otherwise.
With many credit cards, you can earn rewards for the money you spend on the card. That makes up for some of the fees associated with credit cards. You can get special discounts, free merchandise or cash back to use however you want. You won't get that option any longer with most debit cards.
The Best of Both Worlds
You don't have to choose one form of plastic over the other. You can have both in your wallet at all times. Perhaps you want a debit card to pay your bills but a credit card to use on a trip. Or you may use a debit card for your business and then a credit card for your personal expenses. Whatever the case may be, don't focus on the benefits of credit cards over debit cards. Use them in a way that helps you better manage your money.