Debit or Credit?

We are bombarded with applications for credit cards offering special rates, awards, points and prizes if we use one card over another. All of it is designed to convince us to buy things NOW.
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In addition to a credit card, most of us also have a debit card attached to a personal checking account. With all these payment choices, how do you know which one is the best to use, and when? First, know the difference between the two cards.

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A debit card allows you to quickly access your money by using an automated teller machine (ATM) to withdraw cash, or by using the card at retailers, grocery stores, and gas stations. Every time you use your debit card, you pull directly from your checking account balance.

A credit card is obtained from a bank or a merchant. The provider of the credit card decides your credit line, the maximum amount you can charge using that credit card, based on your financial information. A credit card allows you to “borrow” money from the card provider and then pay them back over time with interest on the amount you owe.

To help you determine when to use which card, let me share a story. When my daughter started driving, my husband and I decided to give her a credit card with a small credit line so she could put gas in her car. We then would pay the credit card bill out of her allowance. When we got the first bill, we both hit the floor! As you have probably guessed, she maxed out the card.

My husband and I are accountants, so we were at a loss for words on how our child could have done such a thing. When we asked our daughter how she planned on helping us pay back the large balance, she just stared at us with a look that said “we have to pay that back?” Was she that clueless? Well, actually, yes. And, so are many of us when it comes to educating ourselves, and our children, about the world of debit and credit cards.

Credit cards are a convenient way to buy things today and pay for them later. However, if you are using the credit card for things you cannot really afford, you will drown in interest payments, and it will take you years to pay down the full credit balance. But, if you can afford your purchases and just want the convenience of using the credit card, it can be a great option. Just pay more than the minimum balance, and if possible, pay the credit card balance off every month so you owe minimal or no interest. If you want to pay for something immediately, have a small purchase to make, or you are not disciplined at paying off debt, the debit card is the way to go.

Both debit cards and credit cards are conveniences that help us live our lives more efficiently. If you are honest about your spending habits and disciplined in paying off debt, you can use a mix of both debit and credit cards to effectively implement your payment strategies which will allow you to buy things when you want them, responsibly.

This information is provided with the understanding that the association is not engaged in rendering specific legal, accounting, or other professional services. If specific expert assistance is required, the services of a competent, professional person should be sought.

Provided as a public service by the Pennsylvania Association of Community Bankers.