Debit cards give us the best of both cash and credit cards. When we use it to pay for our purchases, we are using money that is in our bank account – unlike credit cards that use the money of the creditor. You do not have to worry about the high interest rates imposed on the latter because you are using money that you already have. Technically, it is like paying for your purchases in cash – but a lot safer. When you carry cash around and you lose it, you will find it next to impossible to get it back. While good samaritans are still around, it is hard to trace where your cash will end up. A debit card gives us the security that credit cards provide. If you lose your debit card, you simply have to call the card issuer so they will freeze your debit account so no one will be able to use it.
Some people feel like cash is still the best way for you to pay for purchases because you do not have to worry about the bank fees that are usually associated with debit cards. But for those who want to keep their money secure, the clear payment option is a debit card. In fact, an infographic from Consumer Credit reveal that 80% of respondents prefer to use debit to pay for everyday expenses like gas, meals, and their groceries. 100% of respondents between the ages 18 and 24 years old reveal that they use debit for their daily expenses.
There are so many benefits to using this type of payment method and it beats the money that you think you are wasting on bank fees. If you use your debit card correctly, you can even get rewards out of it.
Some people may argue that if you use credit cards and pay off the balance at the end of the month, you do not have to worry about the high interest charges. This makes it difficult for them to decide what to choose between a debit and credit card.
6 reasons why you should use debit more than your credit cards
Of course, there are limits to when and where you can use your debit cards and the same is true for your credit cards. According to the same infographic from Consumer Credit, some people prefer to use debit for small everyday purchases and their credit card for bigger purchases. You need to understand the workings of both cards in order for you to make the right choice whenever you make a purchase.
Let us concentrate on debit cards by discussing the 6 different reasons why it is better than credit cards.
- You will not be in debt every time you use it. As mentioned, you will be using your own money when you use a debit card. You need to put money in the account before you can use it for purchases. When you use credit cards, you are using the money of the creditor. They are lending you the money and you need to pay it back sometime. If not, you will be charged and the interest will be capitalized into your balance.
- You do not have to be scared of interest rates. As mentioned, credit cards are practically loans that you need to pay with interest if you cannot pay it back within the grace period. These cards are notorious for their high interest rates. According to an article published on CNBC.com, the Federal Reserve is thinking of an interest rate hike that should worry credit card holders – especially those carrying a balance over to the next month. In May of 2015, it is reported that the total credit card debt is now at $901 billion and the average balance per household is $15,863 (as of July 2015). The article revealed that only 37.4% of those using credit cards pay the balance at the end of the month. That means the rest of them are being imposed with high-interest rates that are capitalized into their balance. If you are one of them, you need to be cautious if there are news of interest rate hikes. You will certainly not encounter this problem if you use your debit card instead.
- You can enjoy rewards. If you think that rewards are exclusive to credit cards, you are mistaken. Using your debit can land you a couple of rewards from merchants and retailers. Most creditors charge merchants with processing fees and that is why the latter prefer that you use debit in paying for their products or services.
- You are guaranteed that payments are received immediately. If you pay utility bills through credit cards, you need to wait for a certain period to have that amount delivered to company. If you paid on your due date, you might end up being late on your payment. Since debit cards are practically like cash, your payments are usually sent faster.
- You can pay less on your taxes. This is something that consumers are not really aware of. If you want to save on taxes, you should pay it with your debit card. Using your credit card will result in a 2% charge – depending on your payment.
- You have the opportunity to earn interest. Instead of paying your creditor interest, did you know that debit cards can make you earn interest? There are banks, credit unions and other financial institutions that will allow you to avail of an interest-bearing checking account. As you use it, you will get annual percentage yields that will help you accrue dividends. If your debit card is connected with this type of account, you will really benefit from it.
These reasons, if it rings true in your financial situation should help you decide if you should use your credit card or your debit card.
How to use debit and still get a high credit score
The thing that makes it difficult to completely choose debit over a credit card is the fact that you need the latter to help you build up your credit score. The thing with this score is that once you have a good rate going, you have to continually use credit so you can maintain that high credit score. It can be a dilemma for those who want to stick to using debit cards so they can avoid debt.
According to an article published on TheStreet.com, the credit score of consumers are getting better. More consumers have a FICO score that is 800 or higher. Fewer consumers have a score that is lower than 550. The average score is higher than 10 years ago (695 in 2015 compared to 688 in 2005).
This bodes well for consumers but you need to understand that you should use credit so you can maintain that improvement on your score. But if you want to avoid credit cards, that is alright. There are others ways that you can keep your credit score up while you avoid debt or stick to your debit cards.
- Ask your landlord to report your rental payments. If you are consistent in paying your rent, you can ask your landlord to report this to the three major credit bureaus (Equifax, TransUnion and Experian). These can be included in your credit report to reflect your payment behavior. It is not a factor in your credit score but it will show how good you are with payments. There are also companies like RentalKharma that will help you with this report even if your landlord refuses to participate.
- Check your credit report for mistakes. Sometimes, your score is low because of an error. You need to check your score so you can be sure that the info in it is correct. This is also a great way for you to check if there are unauthorized transactions recorded in your credit history. You may already be a victim of identity theft and you do not even know it.
- Use a secured credit card. This is not like credit cards that will endanger you into accumulating too much debt. A secured credit card will allow you to use credit but it is backed by a security deposit. It may seem like debit cards but you are using credit when you use it for purchases. That means it will be reported in your credit history and can affect your credit score.
Here is a video from National Debt Relief that discusses when a good credit score or getting out of debt is more important. According to the video, it really depends on your current financial situation. Knowing if you should prioritize your credit score over debt elimination will allow you to determine which among debit cards or credit cards will suit your financial situation.