Credit cards are a must-have in today’s economy — or that’s what you might think, since they’re all around us. The top eight credit card companies in the US spent more than $1B on ads in 2018 alone, and major blogs like The Points Guy have built empires around teaching people how to maximize credit card rewards.
But that just isn’t true. It’s entirely possible — and reasonable — to tune out the noise and stick to your trusty debit card instead. In fact, debit cards are people’s “overwhelmingly preferred method of payment,” according to recent research. 54% of respondents in that study preferred to pay for things with debit cards, compared to only 26% who preferred credit cards. And debit preference is growing — 2018 had the widest gap of any year so far.
So what’s right for you: credit card or debit card? As the lead CFP® Pro at Ellevest, I’ve helped people work through this question before. Here’s how that conversation usually goes.
Quick recap on how each one works
Your debit card is linked to your bank. When you use it to pay for things, that amount gets withdrawn directly from your bank account. The total amount you can spend is the total amount you have. Pretty straightforward.
A credit card is different — when you use it to pay for things, you’re actually borrowing money from the credit card company. If you pay back all of your purchases by the monthly due date, then no big deal, you’re good to go. But the credit card company doesn’t actually require you to pay it all back right away. Just a minimum payment each month. And if you don’t pay it all off, you’ll “carry a balance” — and that’s when they’d charge you (expensive) interest.
So here’s how your credit card experience would go, ideally:
You charge purchases on your card, and each one gets added to your card’s outstanding balance
At the end of your monthly billing cycle, your outstanding balance becomes that month’s “statement balance”
You pay off that entire statement balance, in full, before the payment deadline they give you
But if you’re going to pay off the whole statement balance, that means you have to keep yourself from charging more than you can afford to pay (meaning what you earn minus all the other things you’re paying for). So you have to be careful not to overspend.
Pros and cons of credit cards and debit cards
The first step is to decide whether you actually want a credit card … or you just feel like you’re supposed to want one. Here are the biggest things to think about.
First, the pros:
Credit. Using a credit card is one of the most accessible ways to build credit — and credit is v necessary for things like apartment leases and loans. (Although it’s not the only way. Other forms of credit, like auto or student loans, can help, as can paying bills on time.)
Rewards. At the moment, credit cards are more likely than debit cards to offer cash back or reward points on your purchases — although this is changing fast.
Extra protections. Both credit cards and debit cards tend to offer $0 fraud liability, meaning you aren’t responsible for charges if someone steals and uses your card. But when you buy things with your credit card, you’re more likely to get extra perks for the actual things you bought, like travel insurance or price protection (although perks aren’t unheard of with debit cards, either).
Emergencies. The instant spending power you get with a credit card can really come in handy in the event of a true financial emergency.
And the cons:
Approval. It’s not always easy to qualify for a credit card, especially if you’re just getting started in the world of credit.
Logistics. Since you’re not actually spending your own money (yet), you have to be really careful not to overspend. Which means a little more mental math to remember how much is in your bank account, consider how much you’ve already spent on the card, and figure out how much you have left over.
Temptation. It’s easy to convince yourself that it’s totally OK if you overspend this one time on this one thing because look at that price, and you’ll definitely pay it all back next month. We’ve all been there, but it’s a slippery slope to credit card debt. And fact: Any rewards your card gives won’t be worth enough to cancel out that interest.
Credit. If you carry too high of a balance or miss payments, it can hurt your credit score.
Interest. The average interest rate on a credit card is high — nearly 18% (and most credit cards have variable interest rates, meaning the card issuer might keep changing it on you). If you carry a balance for more than one month, they’ll charge you interest on your interest — aka it compounds — which makes it much harder to get out of debt once you’re in it.
Simplicity. There’s no bill to pay at the end of the month. Whatever you’ve spent is already spent, no hoops to jump through, no intense mental accounting.
Spending. It’s a lot harder to overspend with a debit card, because once you’ve spent what’s in your account, that’s it — there’s nothing left. Spending any more would overdraw your account and probably hit you with a hefty fee.
Bank Perks. Since your debit card is linked to your bank account, it might play more nicely with any other accounts you have there. For example, transfering money between accounts is probably pretty quick and easy. And then there are programs like Ellevest’s Roundup — every time you make a purchase, the spare change can go from your Ellevest Spend account to your Ellevest Save account automatically.
Lower (or no) fees. See above — this one’s worth repeating.
And the downsides:
Emergencies. Your debit card might fall short if you get hit with a financial emergency. This is true even if you have money in an emergency fund: With a credit card, you’d have instant spending power — no need to transfer the money from savings into checking.
Acceptance. It can be harder to do some things, like book hotels and car rentals, with a debit card. And they’ll probably place a hold charge on your card as a deposit. That means you’d have to have that extra amount in your account.
So which one is right for you?
Here’s the bottom line: If you’re nervous about overspending and would just rather not mess with the whole credit card thing, or if you’re still working on practicing good spending habits and don’t feel like you’re ready for the responsibility of a credit card (more on that in a sec), that’s cool. Stick with your debit card. But if you think you’re financially ready for it, and if you don’t mind the extra work involved in paying a monthly bill, then you could go for the credit card.
You could also just … have both. Maybe you use your debit card for day-to-day purchases and put big things on the credit card. Or maybe you put your bills on autopay on your credit card and use your debit card for everything else. You can do what works best for you.
OK, so how do you know if you’re “ready” for a credit card?
An important question. Before you apply for a credit card, I recommend spending a few months (or more) building really strong money habits with your debit card. That means:
Taking the time to plan out your spending each month
Keeping track of your balance
Not overdrawing your account
Once you’re solid on those three things, take it up a notch by setting up automatic bill payments and / or automatic deposits into a savings account. They’re good practice for credit cards because you’ll need to keep enough money in your debit account to cover the withdrawal, or you’ll pay a painful overdraft fee.
When you’ve been successful with these habits for several months in a row, and when you feel really good about keeping them up — that’s when you’ll be ready.
Don’t be afraid to walk it back
Once you get that credit card and start spending money on it, my first piece of advice is to pay off your balance even more than once a month — especially if your credit limit is low. If you use the card a lot, maybe you pay it off once a week. If you don’t use it much, maybe you pay it off every time a purchase posts to your account. That way, you’ll be way less likely to get caught behind, and your credit utilization (aka the percentage of your credit limit you’re using up) will stay low. That’s important for your credit score.
And my second piece of advice: If you find yourself spending more than you can afford to pay off entirely for two months in a row, then walk it back. Go back to your debit card and pay off your outstanding balance before trying again.
In the meantime, you might want to physically remove your credit card so you aren’t tempted to use it (we’ve all been there). Take it out of your wallet. Hide it in a drawer. Sometimes I even like to suggest freezing your cards — literally, in a block of ice in your freezer.
Some people might recommend cutting your cards up, but I don’t. You might need them in a financial emergency, and if you’ve only removed them from your wallet (or put them on ice), you’ll still have them when you think you’re ready to give that credit card another try.
Now you know what you need to know to decide: Stick with debit only, or get that credit card. Either can help you on your way to financial greatness — it’s just a matter of how.
Short for CERTIFIED FINANCIAL PLANNER™ Professional. (And no, I’m not stuck on caps lock — the CFP Board kindly requests we write those things like that.)
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