Understanding more about debit cards can help you make better decisions to do with your finances. Debit cards have many upsides to them which make them useful in a wide variety of situations. Not everybody knows the right way to use them though. They are great for anybody and are accepted near everywhere making them convenient. However, according to worldwide data debit and credit cards are used at a near equivalent rate. This shows that credit cards must have some advantages over debit cards. In this article we will breakdown all the benefits and drawbacks of debit cards to help you be informed and decide when to use them.
The pros of a debit card
Debit cards are very convenient. Being declined very rarely, they are great worldwide and can be used to withdraw money from widely available ATMs. Withdrawing cash with debit cards means that the money is immediately removed from your account. Because of this fact, you do not end up garnering a balance that you have to pay off. This balance comes with owning a credit card, and you could end up having to pay interest upon it, a problem that debit cards come without. Debit cards are interest-free.
Another advantage of debit cards over their credit counterparts is that in most cases they do not carry any annual fees. This factor is key for it makes them easier to afford. You won’t have to pay or use your debit card to keep it activated. You can make as few or as many purchases without worrying the card’s functionality. Accounts associated with debit cards like chequing accounts do sometimes charge monthly and/or annual fees.
With credit cards, it is quite easy to overspend in the short-term. This is not an issue with debit cards because the money you spend gets withdrawn instantaneously from your account. Your limit is capped at whatever you have stored in your account, though keeping track of your accounts status should be enough to make you weary of purchasing large items you might want. With credit cards you can keep buying and overspending without keeping tabs, which can have grave consequences when the time to pay the stack of bills comes around. Debit cards are also comparatively painless to acquire. Credit card application typically involves a hard credit check to understand more about your history and whether you are eligible. They also require a certain credit score but with debit cards all you need is a chequing or savings account to attach to the card and you’re all set to bank away.
The cons of a debit card
Though they have their upsides, debit cards come with a set of attributes that aren’t all that great. One of their biggest downsides is that in some circumstances they simply aren’t as safe as credit cards. Fraud protection with debit cards can be somewhat insignificant. The Federal Trade Commission dictates that if you notify your bank within two days of it being stolen, you are liable for up to $50 in charges that are fraudulent. If you miss that window of two days you can be held responsible for up to $500. In the worst case scenario where you only let your bank know after 60 days, you could end up paying all of the fraudulent charges. Banks simply cannot ensure total safety, especially with online retailers. Knowing this, it is suggested to use other payment methods when making purchases online. This can help you stay safer from cyber fraud which is rampant in today’s internet, even if you have antivirus software and a secure network.
Wherever and however you choose to spend your money, know that with debit cards your limit is equal to the funds in your chequing account. That means debit cards are better suited to more manageable purchases as opposed to expensive impulse items whose purchasing depends on whether you have the available funds in your chequing account. It is still an option to exceed your chequing account balance. If you do go over you will be charged overdraft fees. You can stop authorizing your bank to charge you these fees but you may end up having your debit card decline when going over your chequing funds.
Despite their similarities, one of the biggest differences between debit and credit cards is also one of the biggest disadvantages of debit cards. It is credit score and how debit cards have no effect on it. With a credit card you can build your credit score by making all your statement payments in full and on time. Debit cards cannot help you achieve this. Of course, credit cards also put you in danger because if you leave your card unpaid or pay late, you can accrue overwhelming debt and you will end up with bad credit. If you owe a lot on your credit cards with high interest, you can roll it over into your mortgage, by borrowing on your home equity line of credit. This will help you repay your credit card loans faster and in a less costly manner. Credit cards also often have strong rewards programs and perks that allow you to automatically accumulate points from use, or give you cashback. Debit cards don’t have programs like these. There are occasions where banks have their own specific rewards for debit cards but it is rarer.
Knowing all this information, you still might not be completely sure when and how to properly use a debit card. Essentially, debit cards are best to use for anything small and routine. This could be a fair list, including things like groceries or monthly entertainment service fees. This is because all the money is directly withdrawn from your chequing account, so you can monitor it easily, making sure you don’t run out. Overtime, this practice will lead to great established spending habits, making you more confident and comfortable with your money. Avoid the purchases carrying more hefty amounts as they are better suited to credit cards. The downsides are not too many, but you should be aware of them. Problems with fraud and the inability to improve credit score are two of the biggest issues.
