Today most establishments prefer you to pay with plastic and not cash, which is understandable. But this leaves most consumers with the question – do you pay with a credit card or debit card?
Millions of people rely on their debit cards for payments, but it has many drawbacks, some of which can be detrimental to your finances.
Here are the top reasons why you should choose to pay with your credit card over your debit card.
There’s Limited Protection for Debit Card Fraud
If someone steals your credit card and makes fraudulent charges, you likely won’t have to pay anything. At most, you may be on the hook for $50, but most credit card companies have a $0 fraud liability coverage today.
The same isn’t always true of your debit card. You’re only protected with a $50 limit of what you’d owe if you report the theft or loss within 2 business days. Wait any longer and you could be on the hook for $500 – to the full amount. You can read more about this on the FTC’s website.
Your Credit Score Won’t Benefit
Banks don’t report your debit card usage to the credit bureaus. If you’re trying to build or improve your credit score, a debit card won’t do it.
Your payment history and credit utilization are the two most important factors of your credit score, but only count when you use a credit card. If you can maintain a balance of 30% or less of your credit line, and make your payments on time, a credit card will provide many more benefits.
Limited Rewards Potential
Credit cards may offer exceptional rewards including cash back, airline miles, or points you can convert to buy gift cards, merchandise, or cash out.
Debit cards don’t offer the same rewards. Very few banks offer minimal cashback opportunities with certain merchants, but debit card rewards are usually limited. Credit cards don’t have these limits and can pay as much as 1% – 5% on all purchases, which is a big difference.
Holds on your Funds can be Financially Devastating
Certain purchases, such as staying at a hotel, renting a car, or other large purchases may include a hold on a large number of funds. Hotels, for example, hold the full amount of the stay plus a security deposit. To make things worse, they don’t release the hold until you check out.
If the hold is for a large amount of money, you may not be able to pay your bills or may even bounce checks. With a credit card, the funds are held from your credit line, which isn’t as big of a deal as holding the funds you need for daily spending.
Final Thoughts
You are better off using a credit card IF you can use it responsibly. Don’t use it as an extension of your credit, but as an ally in your finance journey. Earn the rewards it offers, let it help your credit score, and enjoy the financial protection it offers over a debit card.