Advantage of Credit Card Vs Debit Card
Most personal finance experts spend a lot of energy trying to prevent us from using Credit Cards – and with good reason. Many of us abuse them and end up in debt. But contrary to popular belief, if you can use the card responsibly, you’re actually much better off paying with a credit card than with a debit card and keeping cash transactions to a minimum. Let’s examine why your trusty credit card comes out on top.
- Signup Bonuses (aka Money for Nothing)
There’s nothing like a welcome-aboard perk. Applicants with good credit can get approved for credit cards that offer signup bonuses worth anywhere from $50 to $250 (and sometimes even more). Other cards thank newcomers by bestowing on them a large number of reward points that can be redeemed for fun stuff (more on those below). In contrast, a standard ATM/Debit card that comes with a bank account offers zero money or very small rewards.
- Rewards/Points
Rewards are the ne plus ultra, the undeniable reason why paying with plastic beats paying with cash in almost all cases. Many card rewards work on a point system where you earn up to five points per dollar spent. Often companies will offer special three-month promo periods where spending in a certain category, like restaurants or transportation, nets you double or triple the usual amount of points. When you reach a certain point threshold, you can redeem your points for cash or gift cards at some stores, or to buy items outright from the credit card company’s “rewards catalogue.”
Your credit card rewards options are almost endless. Get a co-branded card issued by a gas station chain, a hotel chain, a clothing store or even a non-profit organization like AAA and you can increase your reward points, but the trick is to find the card that best fits with your spending patterns. Doing the inverse – altering your spending patterns to fit with a particular card – is foolish. But if you’re already spending a few days a month patronizing at a particular hotel or airline, why not use the card that will encourage your continued patronage by offering you discounts?
- Cash Back
The cash-back credit card was first popularized in the United States by Discover, and the idea was simple: Use the card and get 1% of your balance refunded regardless of what you bought or where you bought it. Today, the concept has grown and matured: Some cards now offer 2%, 3% or more as much as 6% back on selected purchases. Some cards, like the Fidelity Investment Rewards card, that offers a higher rate of cash back, in exchange you must deposit your cash back directly into an investment account, however.
- Frequent-Flyer Miles
This perk predates almost all the rest: It was back in the early 1980s that American Airlines, Qantas, Emirates or Virgin followed closely by other Airways, began offering the chance to earn frequent-flyer miles via an affiliated credit card. Now, it seems like every airline has at least one credit card available. Cardholders rack up miles at a rate of one mile per dollar spent, or sometimes one mile per two dollars spent. The price of the plane ticket you ultimately end up redeeming your miles for will determine how valuable this credit card reward is, but many frequent flyer reward credit cards are made valuable by their mileage signup bonuses – these are often enough to put you 50%-100% of the way toward a free flight within a month or two if you are a frequent FIFO traveller or upgrade to business or First Class travel in enjoying the journey and travelling in style like the rich and the famous do.
credit cards vs debit cards
- Safety
Paying with a credit card makes it easier to avoid losses from fraud. When your debit card is used by a thief, the money is missing from your account instantly. Legitimate expenses for which you’ve scheduled online payments or mailed cheques may bounce, triggering insufficient or overdrawn account fees and making your creditors unhappy. Even if it is not your fault, these late or missed payments can thus lower your credit score. This can take a while to be reversed depending on the bank and their process in most cases as much as up to 6 weeks for the money restored to your account while the bank investigates.
By contrast, when your credit card is used fraudulently, you aren’t out any money – you just notify your credit card company of the fraud and don’t pay for the transactions you didn’t make while the credit card company resolves the matter.
- Keeping Vendors Honest
Say you hire a tiler to repair some tiles. They spend the weekend cutting, measuring, grouting, placing the spacers and tiles and letting the whole thing set. They then charge you $2,000 for their labour.
You draw upon your savings account and write a cheque. But what do you do when, 72 hours later, the tile starts to shift, and the grout still hasn’t set? Your entryway is now a complete mess, and that vein in your forehead won’t stop throbbing because of the dodgy job done.
You can take the issue up with your state licensing board, but that process could take months and the contractor still has your money. That’s why, if you can, you should pay for a big-ticket item like this with a credit card. The issuer has an incentive to discourage fraud among its vendors, and if there is a problem, they have a mechanism to try to resolve it. More importantly, if you dispute the charge, the card issuer withholds the funds from the tile setter, and not only will you get your money back immediately you might even get help finding a new contractor.
- Grace Period
As noted above, when you make a debit card purchase, your money is gone right away thus you need to have all your money in an account that does not earn any interest for one to be able to have access, which is not the case of a credit card purchase, your money remains in your savings account & working for you by earning an interest, until your credit card statement arrives to be paid in a couple of weeks later. Hanging on to your valuable funds for this extra time can be helpful in two ways. First, there’s the time value of money: “Inflation” however infinitesimal, will happen between the time you make a purchase and your payment’s due date. Postponing payment makes your purchase that much cheaper. Beyond that, your cash will spend more time in your bank account, and if you pay your credit card from a high-interest Cheque or Interest-bearing Account and earn on your money during the interest free period the extra will eventually add up to a meaningful amount. Second, when you always pay with a credit card, you don’t have to watch your bank account balance depleting like crazy to ensure you stay in the black.
- Insurance
Most credit cards automatically come with a plethora of consumer protections that people don’t even realize they have, such as rental car insurance, Travel Insurance and product warranties that may exceed the manufacturer’s warranty.
- Universal Acceptance
Certain purchases are difficult to make with a debit card as debit card declines if there is not enough funds in your savings account. When you want to rent a car or stay in a hotel room, you’ll almost certainly have an easier time if you have a credit card. Rental car companies and hotels want customers to pay with credit cards because it can be easier to charge customers for any damage they cause to a room or a car this way. So, if you want to pay for one of these items with a debit card, the company may insist on putting a hold of several hundred dollars on your account thus putting you in to budgeting stress. Also, when you’re traveling Overseas, merchants won’t always accept your debit card, even when it has a major bank logo on it.
10. Building Credit
If you have no credit or are trying to improve your credit score that will help you when you are in the market to buy a home etc, using a credit card responsible will help. As credit card companies will report your payment activity to credit bureau viz. Equifax or Veda Advantage. But a debit card use doesn’t appear anywhere on your credit report, however, so it can’t help you build or improve your credit scoring.
When Shouldn’t You Use a Credit Card?
However, paying with credit cards isn’t always better than paying with cash. Retailers honour credit cards because they want to make it easy for you to shop there. But the merchants still have to pay the major credit card companies a commission of about 1.5% of every sale. Since a cash sale means more to the retailer’s bottom line, than an equivalent credit sale does, some retailers give discounts for the privilege of taking your cash immediately. On a big item, like a furniture set, the difference could be substantial. However, you’ll forego the previously mentioned consumer protections offered by credit cards or interest free days, hence it is always good to do your sums when you pay by cash vs credit card.
Then there are other reasons when paying with credit isn’t better, and they have to do with you and your spending habits. Using a credit card may not be right for you under the following circumstances:
- You can’t pay your credit card balance in full and on time.
If this tends to happen to you, stick with the debit (or cash) to avoid racking up interest. - You tend to spend more than you can afford.
Paying with debit will limit you to spending money you’ve already earned. - You can only get a credit card with a very low credit limit and you have a hard time staying under the balance.
The fees for exceeding your credit limit are costly and doing this can have a negative impact on your credit score.
The Bottom Line
Credit cards are best enjoyed when you are disciplined and are able to better manage money, who can remain cognizant of their ability to pay the monthly bill (preferably in full) by the due date. If you already know how to be smart or wise with money and are able to use a credit card responsibly shift as many of your purchases as possible to your credit card, and don’t use your debit card for anything other than for urgent cash/ATM access, this way you will make money work harder either in your saving or offset account of your home loan and reap up all the benefit of using bank’s credit card at no cost or interest payable when paid within interest free period and have the advantage of all of the additional insurances at no cost to you.