Using a Debit Card for Holiday Purchases? Here’s Why a Consumer Advocate Says You Shouldn’t

What is a debit card?

Though it’s likely that you already know what a debit card is, just in case: Debit cards are a type of payment instrument provided by banks and other depository institutions that are connected to checking accounts. Debit card purchases can be made in person at a store, online, or over the phone by inputting your card information. In most cases, a 4-digit PIN will be needed to verify that the card does, in reality, belong to you.

Although some premium cards can be made of metal, the majority of debit cards are made of plastic and have a magnetic stripe and security chip that are used to process transactions.

How are debit cards operated?

You can only spend what you have when using a debit card to make a purchase, just like when using cash.

Therefore, those funds will be taken out of your account and transferred to the retailer as long as you have enough money in the checking account associated with the card. Although this transfer frequently occurs instantly, in some cases, it might take up to 24 hours or longer for the new balance to appear in your checking account.

And if your checking account isn’t sufficiently funded? Whether or not you have chosen overdraft protection through your bank will depend on your decision. A supplementary funding source (typically a savings account or credit card) must be connected to your checking account in order to have overdraft protection.

The transaction will be accepted if you have chosen overdraft protection, and your bank will then transfer the necessary sum from the secondary funding source to your checking account. You’ll also have to pay a fee. The average overdraft fee in 2019 was $33.36 per overdraft, according to Bankrate. Your card will be denied if you haven’t chosen to use your bank’s overdraft protection program.

A fee might apply if you use an out-of-network ATM, but you can additionally utilize your debit card to get cash from an ATM or from some merchants. These costs can be high: The current average, according to Bankrate, is $4.72.

What is a credit card?

In many ways, a credit card and a debit card are comparable. Both have a magnetic strip and security chip, are composed of either plastic or metal, and are used for both in-person and online purchases. But the similarities stop there.

Credit cards are tied to a line of credit, therefore making them a sort of revolving loan that you are able to access as needed. In contrast, debit cards are linked to a checking account (and withdraw funds from that associated account to complete transactions).

How do credit cards function?

The main distinction between a debit card and a credit card is that when you use a debit card to carry out a transaction, you are using your own money, thus you do not have to pay it back.

But you do have to pay it back when you make a purchase using a credit card. The remaining debt will start to accrue interest, just like any other loan, if you are unable to pay it off in full before the payment term expires (which is ordinarily one month). Credit card interest rates can be very high since they are an unsecured kind of debt (they are not secured by a physical asset like a house or car).

The sum of money in your checking account acts as a natural cap on how much you can spend while using a debit card. Your credit limit, another restriction on credit cards, is based on a number of variables, including your credit score.

The greatest sum of money you can ever charge on your credit card is known as your credit limit. Although you are allowed to use the full amount of your credit card, it is typically not a good idea because doing so will raise your credit utilization rate, which indicates how much of your available credit is being used.

Your credit card may occasionally be used to make a cash withdrawal if necessary, just like debit cards can. It is referred to as a cash advance. There is normally a cap on the amount you can withdraw at once, and your lender might impose fees.

When to use a credit card versus a debit card

You might be asking when it makes sense for you to use each now that you are aware of the distinctions between a debit card and a credit card. Debit and credit cards are extremely distinct types of financial instruments. Therefore it’s crucial that you understand when to use each. To make sure you are using the right card at the appropriate time, take into account the following tips.

Think about using your debit card…

If budgeting is new to you

Using your debit card for routine expenses like groceries and other frequent outlays will help you stay within your budget and give you a sense of what typical spending looks like for you if managing your own finances and budgeting are new to you.

If you struggle to keep your expenditures under control

Some of us are better at controlling our expenditures than others. Debit cards are probably a better choice for most transactions if you’ve had trouble in the past controlling your spending.

If you are requesting a mortgage or other significant financing

Accumulating credit card debt could have a detrimental effect on your credit score, your ability to get a mortgage, and the interest rate you will qualify for if you are going to purchase a home and know you will need one. Debit cards are probably a better choice in these circumstances because they have no effect on your credit score.

To use your credit card, think about it…

If you have the intention of building your credit history

The process of opening a credit card can be an excellent way to start building your credit history and may even help you raise your score. Just make sure to start out small, only charge what you can afford to pay back, and pay off your balance each month to avoid being charged interest.

If you are purchasing something online

When you make an online transaction with a debit card or credit card, you put yourself at risk for identity theft. However, credit cards frequently have more robust customer protections, which can help you lower your risk. It could be preferable to use a credit card while making an online transaction.

Read the original article on Grow.

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