Credit vs. Debit: When You Should Charge It

Credit vs. Debit Cards - Quicken Loans Zing Blog

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Airline rewards, cash back and a potential boost to your credit score: what’s not to love about charging your everyday purchases on a credit card? If you have to buy groceries for the week anyway, why not rack up some frequent flyer miles for your next vacation?

By comparison, making a purchase on your debit card seems like a boring, ineffective way to spend your money. But debit cards still have their place in the modern consumer’s wallet – and they can sometimes be a better alternative to paying with a credit card. Here’s a little refresher on the basic ways credit cards differ from debit cards:

  • Credit cards let you make purchases using borrowed money, up to a certain limit.
  • Debit cards use money directly from your bank account to make a purchase – kind of like a cash withdrawal, but in the form of an electronic transfer out of your account.
  • When you charge something on a credit card, you will be charged interest on any outstanding balance that you carry. When you purchase something with a debit card, you will not be charged interest, since the funds for the purchase come directly from your bank account.
  • If you use a credit card responsibly, pay your bills on time and maintain a healthy credit card balance, you could improve your credit score. On the flip side, irresponsible use of a credit card can damage it. Your debit card use does not impact your credit score.
  • Your credit card may offer protection against unverified charges or fraud. These charges are often less protected when using a debit card.

When it comes to sticking to your budget, a credit card allows you to use borrowed funds to pay for larger items that you might not have the money for right away. If you do not pay off the entire balance on your card, you will accrue interest on the money you borrowed. With a debit card, you can only spend money that’s equal to the amount in your checking account – just don’t overdraw your account!

All that said, when exactly should you charge it and when should you swipe your debit card instead? Before you pull out your credit card to make a purchase, ask yourself the following questions:

  • Am I over 30 percent of my debt-to-credit ratio? As a general rule of thumb, you should use no more than 30 percent of your available credit limit. That means you should only carry a balance of $300 or less on a card with a $1,000 credit limit. If you’re going to buy something to put you significantly over the 30 percent mark, you may want to consider using your debit card instead.

Will I spend more money if I use a credit card instead of a debit card? If the answer is yes, you might want to take out the debit card instead. If you’re using your credit card to make a purchase because you don’t have enough money in the bank to cover it with a debit card, take a moment to reconsider. It may not be in your financial best interest – let alone in your budget – to buy that item right now.

Read the original article here!

 

 

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