You’re at the checkout line and it’s time to pay your regular grocery bill. How do you pay for it? As you thumb through your assortment of cards, you do some mental math: can the bank account subsist after another debit charge? If not, does it make sense to charge it to credit? If you’re being honest with yourself, will you actually be in any better place to pay the grocery bill at the end of the month, or will you incur serious late fees?
There are many factors when it comes to deciding, in the moment, on a payment method. This is why people so often make the wrong decision — a seemingly innocuous decision that actually costs them in the long run.
Many people conflate the two payment options, defaulting to whichever card their hand stumbles upon when plunging into a cluttered purse or unorganized wallet. While this is an easy mistake to make, payment indifference inhibits financial growth. It’s important to recognize how these payment options differ in order to make the most out of your finances, so here are the pros and cons of credit and debit payment.
Credit cards are the most popular payment option. A consumer study found that 40 percent of consumers have credit cards, which is five percent more than debit card users. This report found that it is the preferred payment option for Gen Xers who make up a significant portion of the consumer population.
For this demographic, and other savvy consumers, credit cards offer many long term perks in exchange for the debt you incur.
- Rewards — Points, rewards and cash-back add extra value to purchases. Depending on life’s priorities, you can uncover huge discounts and bonuses on items like flights, hotels, retail and more.
- Security — When using credit cards, you are not held responsible for fraudulent purchases and will only have to pay a maximum of $50 in fees thanks to the Fair Credit Reporting Act. This is a valuable protection against the country’s leading consumer crime: identity theft.
- Credit — Credit cards offer a safe, consistent way to boost your FICO score through on-time payments. Payment history accounts for 35 percent of your credit score, so credit cards can have a significant impact on your credit score.
The biggest drawback to credit cards: there is more at stake. Borrowering inexperience, financial hardship, and even mere carelessness can all lead to overwhelming debt that can be hard to overcome. The average household caries nearly $16,000 in debt, which has accumulated as over $900 billion in credit card debt across the country.
The responsibility that comes with a credit card can be too much for some, and if not treated with care, cardholders can easily get upside down on debt. Consumers, be aware of these hazards associated with credit cards:
- Scams — Exploitive cards, which prey on vulnerable consumers, can sink people that had no business borrowing in the first place. Remember: not all credit card issuers have your best interest in mind.
- Market saturation — The sheer volume of cards available can make it hard to compare. This can prevent full understanding of the benefits, or hindrances, a certain card might offer.
- FICO detriment — For all the ways credit cards can improve your FICO score, there are equally as many ways they can damage it. Poor credit utilization, late payments, owning too many cards, and more can all tank your credit score.
Without care, credit card usage can result in high interest payments and an inescapable cycle of debt. For all the benefits of credit cards, there are equally as many pitfalls. So, while this catch-22 complicates credit, they are still a viable payment option — if you possess adequate funds and reasonable self-control.
The primary perk of debit cards is fairly intuitive: you’re spending your own money. With a debit card, you don’t have the same FICO opportunities as you do with credit, and this can be perceived as both an advantage and disadvantage.
For example, debit cards are especially popular among the historically debt-skittish millennial generation — many millenials prefer debit over credit.
For those interested in living within their means, and preventing debt, debit cards are your best bet. Here a few other reasons consumers choose debit over credit:
- ATM — Despite the dwindling popularity of cash, debit users still have the luxury of withdrawing cash quickly from ATMs.
- Automatic transfers — Many debit users enjoy the convenience of easily transferring funds to, and from, a savings account.
- No FICO affect — Again, this could be considered a drawback, but 66 percent of debit users say their most valued feature is the ability to access funds directly from their bank account.
If you’re looking to improve your credit score in any way, debit cards are not ideal. As established above, incremental, on-time credit card payments are a safe and easy way to boost your FICO score. When you spend your own funds, however, you do nothing to improve your credit standing.
This isn’t the only drawback of debit cards — when you make purchases with your own money you are ineligible for rewards. While you benefit from the security of spending internal money, you miss out on opportunities to stretch a buck through travel, airline, and retail rewards.
Other drawbacks to debit card purchases include:
- Overdrafting — If you spend past your account balance you can be charged an overdraft fee. The average fee is around $33.
- Security — Credit card issuers refund fraudulent purchases much quicker than debit cards.
- Stuck with the bill — Failure to report fraudulent charges within a certain amount of time can result in liability and leave you stuck paying for unapproved costs.
Boiling down plastic payment to a debit vs credit deathmatch is actually misleading and reductive. In reality, debit and credit cards serve unique purposes and the appeal of each is directly linked to their specific utility.
Here’s a golden rule to guide your purchasing habits: live within your means, but don’t be afraid to break out the credit card if you are confident you can pay the bill. Using credit will pay off in the long run.
Lexington Law is a distinguished leader in the credit repair industry and has helped consumers improve their understanding of credit for more than 20 years. Contact Lexington Law at 833-333-2281 for a free credit report summary and consultation.