Why a credit card is a smarter choice than a debit card

On the outside, credit cards and debit cards look a lot alike. They both have 16 digits, expiration dates and security codes on the back. But credit cards and debit cards are not the same and there’s often debate in the financial world over which type of plastic is best for the consumer. Some financial pros are firmly in the pro-debit-card (or cash) camp, but I believe that credit cards are a much better choice for your spending.

Here’s how debit and credit cards work and three reasons why I think it’s better to keep your debit card in your wallet and pay with a credit card instead.

Debit card vs. credit card: The mechanics

Debit cards are tied to your bank accounts. When you use your debit card to make a charge, the funds are withdrawn right away (or within a few days) from your account. If you try to use your debit card for a purchase that costs more money than you have deposited, your bank will generally decline the transaction.

Your credit card, on the other hand, works like a portable, flexible loan. You can borrow money (up to your credit limit), pay it off and borrow again. You can repeat this process over and over as long as your account is open and in good standing.

As you use your credit card through a billing cycle, your charges are tallied up on your monthly statement. It’s up to you whether to pay off your full balance by the due date (recommended) or to make some smaller payment toward the amount you owe.

You can get into financial trouble with a credit card if you don’t manage your account well, overspend and allow yourself to get into debt, with expensive interest fees tacked on regularly. It’s true that credit card debt should be avoided, but you’ll miss out on great benefits if you swear off credit cards altogether.

3 reasons a credit card is a smarter choice than a debit card

Credit cards offer better protection

Putting points and miles aside for a moment, the best perk that comes from using credit cards for your purchases is the protection that those pieces of plastic (or metal) offer. When you use a credit card for your spending, it can protect you in three ways.

Credit cards protect you from liability for fraudulent transactions. If you lose a card or it’s stolen and someone else starts charging on it, the federal government has your back.

The Fair Credit Billing Act (FCBA) limits your liability for fraudulent transactions on your card to just $50 (and most major card issuers waive even this responsibility as a matter of policy). Simply report the unauthorized transaction within 60 days of your statement date and you’re covered.

Debit cards are protected from fraudulent transactions too, thanks to the Electronic Funds Transfer Act (EFTA). However, your liability shoots up to $500 if you don’t catch and report the problem within two business days. Also, the money in your bank account can be tied up while the bank investigates the fraud, which could be a serious problem if you have bills coming due in the meantime.

Another credit card protection arises if there’s a problem with the goods or services you bought. Your card issuer might help you get your money back. This protection is, once again, thanks to the FCBA. Imagine you ordered a product but never received it. Of course, you should try to work things out with the merchant first. But if the merchant won’t help you (it happens), you could dispute the charge with your card issuer.

If you’d paid for the same purchase with a debit card, your bank isn’t legally obligated to take or investigate a dispute. The only type of dispute banks have to investigate under the EFTA are fraudulent charges that take place on your debit card.

Your credit card may also come with added benefits, including purchase protection, extended warranties, and price protection. These perks might help you when an item you purchase breaks (or is lost) or when the price of an item you bought suddenly drops. Not every credit card offers these great benefits, but they’re practically unheard-of with debit cards.

Credit-building potential

I prefer credit cards to debit cards for another important reason. My cards have helped me build a healthy credit profile over the years. My debit card doesn’t help me improve my credit reports or scores in any way.

Credit card issuers generally report accounts to all three credit bureaus — Equifax, TransUnion and Experian. As long as you manage your accounts wisely (pay them on time and in full every month), credit cards can help you build solid credit scores over time. The older your credit cards become with a positive payment record, the more they may benefit your credit scores.

Rewards-earning potential

Finally, I love using my credit cards for purchases because of the rewards they offer. In the past six months alone, I earned and redeemed nearly $3,500 worth of free travel — all courtesy of my rewards credit cards.

Best of all, I didn’t have to spend any extra money to earn these rewards. I used my credit card to pay for purchases I needed to make anyway. TPG’s beginner’s guide to earning points and miles is a great place to start if you want to learn more about credit card rewards.

If I had used my debit card to cover my spending instead, I would have missed out on this great benefit. In general, using a debit card for purchases doesn’t give you anything in return.

Bottom line

When you use credit cards responsibly, they’re a smarter spending choice than a debit card — but it is essential to avoid credit card debt. Otherwise, the expensive interest fees you pay will wipe out the value of any rewards you earn.

Using a debit card (or cash) won’t stop you from overspending, though it might limit the damage. But it is possible to avoid overspending with your credit cards as well.

If you’re worried about charging more than you can afford to pay off on a credit card, find a convenient way to track your spending. You can use a money management app, a note on your phone or even old-fashioned pen and paper to set spending goals and stick with them.

As soon as you trust yourself to use credit cards responsibly, it’s time to put away your debit card and start reaping some rewards.

Featured photo by Andrew Harrer/Bloomberg via Getty Images