These days, most of us carry both a credit card and debit card in our wallets, but odds are we’re doing more swiping with our debit cards than anything else. (For a long time, I know I was.)
But did you know that there are a lot of benefits to using your credit card that you might be missing out on, including improvements to your credit score, cash back rewards and, most importantly, better fraud protection?
In many instances, credit cards offer many more benefits than debit cards, so long as you’re swiping responsibly. Here’s the argument for ditching your debit card (or at least moving it to the back of your wallet) for your credit card…
Improve Your Credit History
Credit scores are based on a lot of different factors, but one of the biggest is credit history. If you show credit card companies that you use credit actively and pay a good portion of your balance back (at least 30%) each month, your credit score will only improve. That set-it-and-forget-it myth to building credit by simply owning a credit card is just that – a myth.
The more active you are with your credit card, the more likely you are to be approved for a loan or another, better credit card in the future. Debit cards, however, do not have any impact on your credit score. Advantage: Credit Cards
No matter how many times you swipe your debit card, odds are you’re not getting any rewards in return. Airline miles, cash back, free hotel nights – these are ALL things you can earn when you become a regular credit card user. Think about all the items you purchased using your debit card this month; imagine if you received even 1 or 2% cash back on those purchases?
These points/rewards can add up over time, and some credit cards offer even more cash back on specific categories throughout the year. (Gas, groceries, etc.) So, depending on what you’re purchasing and what kind of credit card you have, you can earn some serious rewards over time. Can you recall any type of reward you earned for using your debit card? Me neither. Advantage: Credit Cards
Update: This card is no longer available, but you can view other cash back cards here.
The TrueEarnings® card from Costco and American Express is an ideal card for earning cash back on your gas purchases. As a matter of fact, the card gives 3% cash back on gasoline at U.S. stand-alone gas stations. Plus, it’s an American Express® Card and Costco membership card, with no annual fee for Costco members.
Let’s get one thing straight: Your bank DOES protect you from fraudulent categories. However, if you’ve ever had to dispute an unauthorized charge tied to your bank account, then you know that the process can be…frustrating. And time consuming.
However, if you’ve ever attempted to use your credit card in a location not generally tied to your home address (say, Las Vegas), then you know that credit card companies will generally contact you upon completion of a transaction to verify that it’s you. You may have even had your card denied from making the transaction, as credit cards are better equipped to stop fraudulent charges in their tracks.
Plus, debit cards are attached to one’s bank account, so if an identity thief gets a hold of this precious information, your entire personal finance folder could be at risk. On the contrary, credit card accounts are isolated, and most credit card companies include 100% fraud protection. (DON’T sign up for a credit card without confirming this first.) Overall, the risks of using a credit card are marginally lower and the chance of protection better versus a debit card. Advantage: Credit Cards
This is the only category in which we’ll give debit cards the nod over credit cards, since you can only spend what you have in your checking account. Credit cards can be dangerous if you’re an overzealous spender, and credit cards with higher limits can get you in the most debt trouble if you’re not responsible. Those risks simply aren’t there if you use your debit card exclusively, especially with overdraft fee protection. Advantage: Debit Cards
If you’re worried that you or your college student isn’t quite ready for the responsibility of a credit card, start with a low limit, low risk credit card to begin. Or, get in the habit of swiping responsibly (with, say, a prepaid debit card) before placing that shiny new credit card in your wallet. It will save you in the long haul.
Overall, the benefits to using your credit card over your debit card can be exponential; just make sure you know how to manage your finances responsibly before jumping into the world of credit. Set budget limits, only spend what you need and remember to pay back your credit card balance in full at the end of each month to avoid interest fees. From there, you can take advantage of all the perks to owning a credit card.
[box type=”note” icon=”none”]This post is a guest post from Jason Bushey, Vice President of Creditnet.[/box]