“Credit or debit?” You have probably run into this question many times when checking out at a store, or perhaps you have wondered to yourself which one is better to use when handling utilities payments or other transactions. Knowing the benefits and drawbacks of using credit versus debit cards is extremely important because this can have long-term implications on things like your credit score, fraud susceptibility, and more. So if you find yourself asking this very question, read on for a thorough assessment of the merits related to debit versus credit card usage.

BUILDING CREDIT

When it comes to building credit, use credit cards. Every time you use your credit card and pay off your monthly bills, you are building your credit score. This is extremely important for your financial future, especially if you try to buy a house or take out a large loan. Building a strong credit history is critical. Debit cards can indirectly contribute to your credit score if you use them to pay off things like utilities bills, but the magnitude of this impact is considerably less than if you use your credit card and are diligent about credit card payments.

CONTROLLING DEBT

When it comes to controlling debt, use debit cards. Transactions with debit cards involve transfers of money out of your checking account, so if you do not have sufficient funds, you simply will not be able to complete your transaction. With credit cards, on the other hand, issuers lend you money to use for purchases, and unless you pay off your outstanding balance in full each month, you can quickly rack up significant amounts of credit card debt. By using debit cards, you avoid paying more than you can afford, and it inherently makes you more conscious of spending. This is a great strategy to control debt.

PREVENTING FRAUD

When it comes to preventing fraud, use credit cards. Fraudulent activity can happen to your accounts anywhere at any point in time, and it is especially common when you make purchases online. Credit cards are best because they provide greater inherent protections and do not link directly to your personal funds. Plus, credit card companies usually offer robust fraud protection and may even cap your liability if you are a victim of fraud. Debit cards, on the other hand, link directly to your checking account, and if you discover fraud too late, you may not be able to recover lost funds.

LIMITING FEES

When it comes to limiting fees, use debit cards. This is particularly relevant with ATMs and tax or utility payments. Debit cards are preferable for limiting withdrawal-related fees for ATM transactions, especially if you use an ATM affiliated with your bank. Technically, you could use a credit card to withdraw funds, but remember that you are ultimately borrowing this money and will face interest liability. Debit cards are also more preferable to limit convenience fees associated with paying taxes or public utilities bills. You may be charged 2-3% extra for using a credit card, which can be a quite large depending on the base amount you owe, so always opt for debit cards.

SO…CREDIT OR DEBIT?

As you can tell, it depends. While there may not always be a right answer, these guidelines should help you to identify the scenarios in which one is more preferable over the other. So be sure to choose wisely!