Credit and Debit Cards: What You Need to Know
Executive Summary By Jennifer Barrett

Credit cards have been around since the 1950s, and debit cards were introduced in the mid-1970s.

Though the two types of cards may be used interchangeably, there are notable differences between them. Let’s start with debit cards.

Debit cards are linked to your bank account so the money you spend is automatically deducted from your account. They provide a convenient alternative to cash, especially if you do a lot of shopping online. Debit cards can also help you budget. Use your card to pay your bills and day-to-day expenses and your monthly statement will provide a good snapshot of how much you spend per month and where it’s going. There’s another benefit as well: Unlike credit cards, your bank balance goes down with each debit card transaction, so you’re less likely to overspend.

With so many benefits to the debit card, why use a credit card at all?

There are three main reasons: You can spend more than you have – or postpone paying, at least – and you typically get better rewards and better protection than you do with debit cards.

Credit cards basically allow you to use someone else’s money (the card issuer’s) to make a purchase while you pay the money back later. If you do so within the billing period – generally, 15 to 45 days – you can avoid paying any interest on it. The problem arises, of course, when you don’t pay the balance in full and are charged interest as well.

If you use them responsibly though, credit cards can offer other advantages. They help build your credit, as long as you pay your bills on time. Some also offer rewards that you can use to get gifts, cash back or discounts for products, services and special events. They also provide more protection if someone steals your card or bank information. If you notice a fraudulent charge on your credit card account, you can call the card issuer, make a dispute claim, and the charge should be removed from your balance. But if thieves steal your debit card information and use it, it may take weeks for the bank to investigate your claim and replace the lost funds. In the meantime, you may have to deal with a dwindling bank balance or bounced checks.

Federal law also protects you if you need to dispute charges on a credit card, but not if you use a debit card or other forms of payment. If you paid cash or used a debit card, the retailer already has your money. So you have a lot less leverage, and there’s no guarantee you’ll get that money back. But if you pay for something with your credit card and aren’t happy with the purchase, your card issuer can legally withhold payment from the retailer until they resolve the dispute, and you won’t be charged.

If you plan to pay your bill in full each month, seek out a card that provides rewards you actually want – whether that’s cash back, frequent flier miles or points redeemable for gifts. The interest rate shouldn’t matter, since you won’t be carrying a balance. But look for those with no annual fee.

Generally speaking, if you plan to use your card a lot, cash-back programs may be the best bet. It’s easy to get the refund – either through a check or a credit on your account – and you can use that money for anything. Many large banks also offer debit cards with rewards, so it can be worth shopping around for them too.

For most people, using both a debit card and credit card makes sense. The key is not to spend more than you have with either. If you can do that, you’ll be able to enjoy the benefits that each provide.

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