Editor’s Note: This is a recurring post, regularly updated with new information.
Outside, credit and debit cards look very similar: Both have 15-16 digits, an expiration date, and a security code.
But in reality, credit and debit cards are not the same thing, and in the financial world there is often a debate about which plastic is best for the consumer. Some financial experts are adamant in favor of debit (or cash), but at TPG we believe a credit card is a much better choice for your spending.
In this guide, we’ll break down how debit and credit cards work and three reasons why we think it’s better to store your debit card and pay with a credit card. replace.
Mechanism of credit and debit cards
The debit card is tied to your bank account. When you use your debit card to charge, the money will be withdrawn immediately (or within a few days) from your account. If you try to use your debit card to make a purchase that costs more than you deposited, your bank will often reject the transaction.
Your credit card, on the other hand, acts like a flexible, mobile loan. You can borrow money (up to your credit limit), pay it off, and borrow it again. You can repeat this process as many times as possible as long as your account is open and in good standing.
When you use your credit card through a Payment cycle, your fees are charged to your monthly statement. It’s up to you to pay off your balance in full by the due date (highly recommended) or at least make the minimum payment for the amount you owe.
Some people avoid credit cards for fear of getting into serious financial trouble with credit card debt. This is a valid concern since credit card interest rate are usually high and can increase rapidly. You should definitely work to avoid credit card debt, but you can still reap the many rewards of credit cards by practicing responsible credit card use.
Related: TPG’s 10 commandments for credit cards
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Credit cards offer better fraud protection
Put points and miles Take a moment – just for a moment – the best benefit that comes from a credit card is the protection that those pieces of plastic (or metal) offer.
First, credit cards protect you from liability for Fraudulent transaction. If you lose your card or it gets stolen and someone starts charging it on the card, the federal government will back you up.
The Fair Credit Billing Act (FCBA) limit your liability for fraudulent transactions on your credit card to just $50 (and most major card issuers even disclaim this liability as a matter of policy). Make sure you report an unauthorized transaction within 60 days of your statement and you’re protected.
Debit cards are also protected from fraudulent transactions thanks to the Electronic Funds Transfer Act (EFTA). However, your liability increases to $500 if you don’t catch and report the problem within two business days. In addition, funds in your bank account may be locked while the bank investigates fraud, which can be a serious problem if you have bills due in the meantime.
Another credit card defense arises if there’s a problem with the goods or services you’ve purchased: your card issuer can help you get your money back. This protection is, again, thanks to FCBA. Imagine you ordered a product but never received it. Of course, you should try to settle things with the seller first. But if the merchant doesn’t help you (it happens), you can dispute the charge with your card issuer.
If you paid for the same purchase with a debit card, your bank is not legally obligated to act or investigate the dispute. The only type of dispute that banks have to investigate under EFTA is fraudulent charges on your debit card.
Finally, your credit card may also have additional benefits, including purchase protection, extended warranty And price protection. These perks can help you when an item you buy is damaged (or lost) or when the price of an item you buy suddenly drops. Not every credit card offers these amazing benefits, but the reality is that they’ve never been known for a debit card.
Related: Reasons Why You Shouldn’t Use Your Debit Card
Credit cards help you build credit
We prefer credit cards to debit cards for another important reason: credit cards help you build a healthy credit profile. On the other hand, a debit card doesn’t help you improve credit report or score whatever.
Credit card issuers typically report accounts to all three major credit bureaus (Equachus, TransUnion and Experian). As long as you manage your account wisely (Pay on time and in full every month), credit cards can help you build a solid credit score over time. The older your credit card with a good payment record, the better your credit score.
Related: 6 things to do to improve your credit
You can earn rewards by credit card
Finally, we love credit cards for the rewards they offer. Whether you are planning a big trip or just try save some cashCredit card rewards can help you achieve your goals.
We love that you can earn rewards just by using your credit card for purchases you intend to make. While some cards have an annual fee, the benefits almost always outweigh any additional costs. Debit cards, on the other hand, rarely give you anything back for using them.
If you want to start coming up with a strategy to earn credit card rewards from your daily spending, TPG’s A beginner’s guide to earning points and miles is a great place to start.
bottom line
When you use credit cards responsibly, they are a smarter spending choice than debit cards — with the main focus being on avoiding credit card debt.
If you’re worried about charging more than you can afford to pay with your credit card, there are convenient ways to track your spending. You can use a money management appa note on your phone or even old fashioned pen and paper to set spending goals and stick with them.
As soon as you believe in yourself Use credit cards responsiblyIt’s time to put away your debit card and start reaping some rewards.
Additional reporting by Emily Thompson and Stella Shon.
