Credit or debit cards: Which option is more advantageous?

At first glance, credit cards and debit cards appear quite alike: Both feature 15-16 digit numbers, expiration dates, and security codes.

However, credit and debit cards serve different purposes, leading to ongoing discussions in the financial community about which is more beneficial for consumers. Some financial experts strongly advocate for debit cards (or cash). At TPG, we assert that credit cards represent a far superior option for your expenditures.

We will clarify the workings of debit and credit cards and provide three reasons why we recommend setting aside your debit card and opting for a credit card instead.

Understanding the workings of credit and debit cards

Debit cards are linked directly to your bank accounts. When you make a purchase with a debit card, the money is deducted immediately (or within a few days) from your account. If you attempt to use your debit card for a transaction that exceeds your available funds, your bank typically will reject the purchase.

In contrast, your credit card functions like a convenient, adaptable loan. You can borrow money (up to your credit limit), repay it, and then borrow again. This cycle can continue as long as your account remains active and in good standing.

As you utilize your credit card during a billing cycle, your expenses accumulate on your monthly statement. You can choose to settle the entire balance by the due date (highly advised) or make at least the minimum payment on the owed amount.

Some individuals shy away from credit cards due to concerns about falling into serious debt. This concern is valid, as credit card interest rates tend to be high and can accumulate rapidly. While it’s crucial to steer clear of credit card debt, you can still enjoy the numerous benefits of credit cards by using them responsibly.

Credit cards provide superior fraud protection

Setting aside points and miles for a moment, the most significant advantage of credit cards is the protection they offer.

Primarily, these cards (whether plastic or metal) shield you from liability in the event of fraudulent transactions. If your credit card is lost or stolen and someone makes unauthorized charges, federal law protects you.

Under the Fair Credit Billing Act, your liability for unauthorized charges on your credit card is capped at $50 (and most major card issuers forgo this responsibility entirely). Just be sure to report the unauthorized transaction within 60 days of your statement date to stay protected.

Debit cards also offer protection against fraudulent transactions, courtesy of the Electronic Funds Transfer Act. However, your liability can escalate to $500 if you don’t report the issue within two business days. Additionally, the funds in your bank account may be frozen while the bank investigates, which can be problematic if you have upcoming bills.

Another advantage of credit cards is the assistance they provide if there are issues with the products or services you purchased. In such cases, your card issuer may help you recover your money, thanks to the FCBA. For instance, if you order an item that never arrives, it’s wise to first attempt to resolve the issue with the merchant. If that fails, you can dispute the charge with your card issuer.

If you had used a debit card for the same transaction, your bank is not legally required to handle or investigate disputes. The only disputes they are obliged to look into under the EFTA are those involving fraudulent charges on your debit card.

Finally, credit cards often come with additional perks such as purchase protection, extended warranties, and price protection. These benefits can assist you if an item breaks (or is lost) or if its price drops after purchase. While not every credit card includes these advantages, they are almost nonexistent with debit cards.

Credit cards assist in building your credit

We favor credit cards over debit cards for another crucial reason: they help you cultivate a strong credit profile. In contrast, debit cards do not contribute to enhancing your credit reports or scores at all.

Credit card companies typically report account activity to all three major credit bureaus (Equifax, TransUnion, and Experian). If you manage your accounts effectively by paying on time and in full each month, credit cards can significantly boost your credit scores over time. The longer your accounts remain active with a positive payment history, the more beneficial it is for your credit score.

With credit cards, you can earn rewards

Ultimately, we appreciate credit cards for the rewards they provide. Whether you’re planning a major vacation or simply looking to save some money, credit card rewards can assist you in achieving your objectives.

We love that you can earn rewards just by using credit cards for purchases you were already going to make. Even though some cards may have an annual fee, the advantages usually far exceed any extra cost. In contrast, debit cards seldom offer any benefits for their use.

If you’re interested in creating a strategy to earn credit card rewards from your daily spending, TPG's beginner's guide to earning points and miles is an excellent starting point.

In summary

When used wisely, credit cards are a more advantageous spending option compared to debit cards—provided you avoid accumulating credit card debt.

If you’re concerned about overspending on a credit card, there are easy methods to keep track of your expenses. You can utilize a money management app, jot down notes on your phone, or even resort to the traditional pen and paper to set and adhere to your spending goals.

Once you feel confident in your ability to manage credit cards responsibly, it’s time to set aside your debit card and start enjoying the benefits.