Credit card vs debit card when to use which?

Author: BankFeeInsider.com     Tuesday, August 19, 2014 12:00 AM

Debit cards and credit cards are both invaluable resources to use when managing your short-term and long-term financial stability. Though both cards are similar in nature in that they can be used to pay for goods and services, they are actually quite different and should be treated as such. Using both debit cards and credit cards incorrectly can quickly lead to financial disaster. If you use a debit card incorrectly and overdraft, for example, you're looking at hefty penalties by way of overdraft fees. Using a credit card incorrectly can see your interest rate skyrocket, which will lead to paying more money in the long run. One of the keys to using both of these two types of cards correctly is knowing which situations are appropriate for one versus the other.

 

Debit cards are great for small purchases that you already have the existing funds to pay for. One of the great things about debit cards is that they are essentially the same as writing a check, at least as far as your finances are concerned. A debit card is tied directly to a checking account or savings account with your local bank. You shouldn't use a debit card for purchases using the "buy now, pay later" mentality because you can only spend the amount of money you have in the associated account. If you only have $1000 in the account and you want to spend $2000, for example, you'll be out of luck. If you're heading out for a nice dinner, want to fill up your gas tank or want to make other types of small purchases, debit cards are great tools to keep in your wallet or purse.

 

If you're trying to build your credit by establishing a history of paying your bills on time and in full each month, however, you're going to want to use a credit card to do so. Because debit cards are tied directly to your bank account, you're only using money that you already have to pay for items. Creditors don't care that you aren't over drafting your bank account because you aren't taking on new debt when making purchases. If you have an average or poor credit history and are trying to get that up to acceptable levels, use a credit card for as many transactions as you can afford. By regularly using your credit card and making payments on or before the due date each month, you're showing creditors of all types that you can be trusted with money. Your credit rating will slowly but surely start to rise as a result and you'll find it easier to get approved for larger and more important loans in the future.

 

Another situation where credit cards are preferred over debit cards is in situations where you're buying expensive items like television sets. Many credit cards feature perks like an extended manufacturers warranty. Those types of perks won't be found when using a traditional debit card for the same transaction.

Source: BFI