Credit Vs Debit Cards: Which is Better for Your Savings? Which is Worse for Debt and Bankruptcy?
Credit cards and debit cards compared on the bases of financial stability, cost, security and benefits
Get Out of Debt Today is going to tackle the age-old debate, which is better: credit cards or debit cards? What we can bring to this is that we are going to focus especially on which is better for your savings and your debt; which is better for reducing debt and which is worse for potentially causing bankruptcy, insolvency and spiraling debt.
What’s The Difference Between A Debit Card And A Credit Card?
Are credit cards and debit cards the same?
A debit card is: a card that gives you the convenience of withdrawing money from your account and using it whilst paying for goods and services.
A debit card isn’t: a card that can be used to take a loan from the bank whilst paying for goods and services, if you don’t have enough money in your account to pay for them. If you try to withdraw more money than you have with a debit card, the withdraw will fail to occur.
A credit card is: a card that lets you borrow from the bank at your convenience, when buying goods and services, even if you don’t have the funds. A credit card isn’t actually linked to your main bank account, it has its own account that borrows cash from the bank that you must repay at a later date. Interest is charged until you repay it although sometimes there is an interest-free period, so you may not be charged if you pay it before this date.
A credit card is not: a card that lets you withdraw from your current bank account on the go. A card that links to your current bank account.
Credit Card Pros And Cons
Why do people use credit cards?
There are a number of reasons why people choose to use credit cards over other types of cards. Credit cards do have their benefits, namely the ability to earn points and rewards by using them which can be of great benefit. If you can pay off your credit card debts easily while avoiding having to pay interest, then credit cards have very few downsides apart from fees and costs.
Taking advantage of interest-free periods by paying the amount owing on your credit card before this period elapses can be very cost-effective, even free in some cases.
Avoiding the inconvenience of not being able to pay for things that you need because you haven't gotten your paycheck or something of the sorts.
If your credit card is stolen, you will still have access to its account, so you will still be able to make payments.
Rewards programs can become very beneficial if you make most purchases or major purchases with your credit card. You can often accumulate enough points to afford a airfare to another country after a few years.
Much better security for the case of a stolen card. Your maximum liability for loss as a result of a stolen card is just $50.
Better legal security also. Many opt for credit cards because of the security they provide.
Why should you avoid credit cards
On the opposite side, credit cards can have a really negative effect on your life. Many people get a credit card and use it on unnecessary items, racking up debts they are unable to pay off. This is the main problem with credit cards; you are able to spend money that you don’t have access to. You then face extremely high interest rates.
Often have steep fees on outstanding debts. The problem with this is that most people who have credit cards don’t have a spending problem and believe very reasonably that they can pay their fees every time. But when a crisis strikes, that’s the one time that they can’t pay their fees and their financial disaster gets a lot worse because of their credit card debts. Sometimes there is no financial crisis, but instead, an innocuous purchase turns into a huge financial mistake because the credit card debt repayment was forgotten for whatever reason. Thankfully, there are often ways to make automatic payments nowadays to mitigate this risk.
A bad temptation for people with an overspending habit, shopping addiction, a gambling problem, substance abuse or any other bad financial habit. The main criticism of credit cards is that borrowing money is too easy, and that acquiring a credit card is a one-off, whereas using it for bank loans continues on into the future, during which time a person may develop a spending problem or enter financial strife.
High interest payments are a massive problem with credit card debts. Once you get into debt it can be almost impossible to get out with interest crippling your ability to pay off the debt.
Debit Card Pros And Cons
Why do people use debt cards?
In terms of making sure you don’t overspend, a debit card is the best tool. With a debit card you are unable to overspend, using money directly from your account to pay for things rather than using credit from your card provider. It also has the same usability as a credit card in terms of using them to pay for things.
Less temptation to overspend.
No possibility of accumulating debts.
If your card is stolen, the amount of money that can leave your account is confined to a spending limit, and the amount you keep in your account. If you lose your card, you can always withdraw all cash from the account immediately to minimise the loss.
Like credit cards, useful for spending online and overseas.
You only spend your own money.
Why do people avoid debit cards?
The cons for a debit card are less impactful of you are likely to overspend but there are some negatives. Namely if you have a large expense you may not be able to pay for it without taking out credit. If you don’t have enough money to pay for certain things, then a credit card might be needed. Many people have a credit card especially for this reason, only using it in case of emergencies.
Less security. This is the one major downside of debit cards and the reason why despite their numerous obvious points of advantage, many still opt for credit cards. A stolen debit card can cost you $1000 in many cases, for this is a common daily spending limit, but in many cases it is as high as $2000. And the inferior legal security of debit cards makes recovering this stolen money less likely unfortunately.
You cannot use your debit card to pay for things in emergencies. If you have a medical emergency or need to make home repairs, if you don't have a credit card then you will have to make a full upfront payment, which can be a problem if you don't have enough money saved in your account.
You don't accumulate points. One benefit of a credit card is accumulating points on it, which isn't a feature on a debt card. If you trust yourself to pay off your credit card then this is an added bonus to paying for things on your credit card.
So Which Is Better? A Debit Or Credit Card? | Card Security
Which should I buy, which is better to buy; a debit or credit card?
The straight answer: in almost all cases, a debit card is the better option. The average Middle Class Australian doesn’t have the financial security to make taking advantage of the interest-free period for credit cards worthwhile. The small saving over debit card transactions doesn’t outweigh the risk of one day not being able to repay the debt or forgetting to. This is why credit card debt is one of the most common causes of debt, too often causing spiraling debt and the debt trap.
But, especially if you have above average financial security and are a large spender (but not problematically large), then you should consider a credit card for its rewards and added security. The benefits and rewards you can receive from using a credit card can potentially add up to thousands of dollars. If you are spending the money anyway, why not use a card that is going to get you points. Of course the flip side to that is over spending, but if you are able to pay off your card then a credit card may be the better option.
What if I Have Both a Debit And Credit Card?
Which Should I Use First? My Debit Card or Credit Card?
Many Australians choose to have both types of cards. Usually they will use their credit card for bigger purchases and to get points while using their debt card to pay for everyday things. Their credit card spending is usually more moderated in that they ensure that they are not overspending.
We recommend that you use your debit card as your first option whenever possible. Debit card fees are often less and they are certainly less complicated. Transaction fees and operator fees often apply to debit cards, but they are a matter of dollars and a fixed rate. They are much less complicated, nuanced and likely to be forgotten than credit card fees. Forgetting to pay your credit card fees even for a small purchase is a mistake that can cost you greatly.
If you are going to use your credit card for your everyday purchases, make sure you stay on top of payments and get a card that has a good interest rate just in case. Even if you think you will always reach payments, its a good idea to make sure that you have that extra security. Use a credit card comparison site to find out the rates of different cards. The benefits of using a credit card properly are great, but you need to make sure that you control your spending and pay back your credit card debt.
What Is The Best Payment Option Overall? | Choosing The Right Credit Card For You
But what is the best payment option overall? Is it credit cards or debit cards? Each person will have different circumstances that are specific to them and each person will also have a different opinion on spending money. So if you are more likely to find yourself in debt, then a debit card is better for you, whereas, if you are smart with your money then there are many benefits to paying with your credit card.
Another option is paying in cash. Cash has no fees, no fine print and no terms and conditions. Of course, you won’t have the cash on hand every time, which is when a card comes in handy.
If you have used your credit card and overspent, you may find it difficult to pay of the debts. This is where Get Out Of Debt Today can help you to reduce your debts, negotiating your debt with your creditors to get you a fair deal that you are able to pay off rather than you having mountains of interest payments and debt to repay. Call us today on (02) 9011 7919 for a free consultation and information session.