Do You Need a Debit Card?
Debit cards are similar to credit cards but without the scary interest rate worries, right? Well, not quite. Although both are made of plastic and can be used to buy just about anything, there are important differences that you need to be aware of. And although debit cards don’t charge interest on your purchases, that doesn’t necessarily mean they are always better than credit cards.
Debit? Credit? What's the difference?
A purchase you make using a credit card is a loan to you from the card issuer. As such, it gives you the option of paying down the debt over months or even years.
A debit card, on the other hand, is akin to a personal check: The funds you spend using it come straight out of your bank account. There's no opportunity to repay in installments.
So far, a debit card might seem somehow "safer" than a credit card. But looks can be deceiving. Credit cards actually offer a host of features that makes them very attractive. Here's a rundown:
1. If someone uses your credit card fraudulently, you are on the hook for a maximum of $50; with a debit card, you could have your bank account emptied and you'd be out the whole amount. Even if you eventually recover every cent, you're still out the money until the matter is resolved.
2. With a credit card, you can use the money free of interest charges if you pay off the full balance within the grace period. With a debit card, the money leaves your account as soon as the charge is posted.
3. Payments made via debit cards aren't reported to credit bureaus, so you aren't building up your credit history when you use them. Regular use of credit cards, on the other hand, can improve your credit score over time — provided you make your payments on time and don't max them out.
4. Credit cards provide protection from fraudulent merchants. If you pay with a credit card and the merchandise isn't delivered or is defective, you can dispute the charge and withhold payment until the matter is resolved. This isn't an option with debit cards.
5. Some debit cards offer rewards for their use, but credit cards are still the champs at cash-back offers, airline miles and other valuable perks.
Despite these drawbacks, debit cards have their fans. Some allow fee-free cash back on purchases at grocery stores and other merchants. This provides free access to cash, something not usually offered by credit cards. And, of course, a debit card forces you to live within your means because you can't use it to borrow money. And for those tempted to spend when they hold a credit card, that's a perfectly good reason to put a debit card in your wallet.
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