For some reason, I have been getting several video recommendations encouraging people to use credit cards instead of debit cards. However, many proponents of the FIRE movement advocate not using credit cards at all. Obviously, this advice is contradictory coming from so many financial gurus.
As for me, I take the middle road when it comes to this issue. Though I am a strong proponent of living a debt-free lifestyle, I advocate using credit cards responsibly. I also enjoy using debit cards because they likewise have many benefits and useful features. I think they are just as vital to a sound financial plan as credit cards and similar financial tools.
Neither of them is inherently good or evil. It’s all about how you use them. Both have their own levels of protection, rewards, and practical uses. So, let’s begin by exploring the features of both debit and credit cards and determine when it is best to use either type of card.
Credit Cards
In general, credit cards provide more protection from fraud than debit cards. This is a built-in feature that makes most credit cards very attractive. Credit card companies usually automatically credit your account whenever there is unauthorized use or suspicious activity. This feature is usually free with most credit cards. However, premium or luxury cards provide a higher level of protection than other cards.
Credit cards also provide other beneficial rewards inclusive of cashback, free or discounted travel, or groceries, gas rebates, etc. I am not going too deep into this subject because I have covered it in previous posts. From a practical perspective, credit cards are accepted almost anywhere – this includes international spaces. In which case, they can help you avoid foreign transaction fees if you have a card that covers such expenses.
From a practical perspective, credit cards are great when you need to “borrow” money. They are much more convenient than applying for a loan or line of credit, especially for smaller purchases. Of course, this strategy is only effective if you use your credit card responsibly.
So for these reasons and more, I often advocate the use of credit cards when you are:
- Traveling abroad
- Building a solid credit history
- Covering unexpected expenses
- Making online financial transactions
- Purchasing from questionable vendors
However, beyond simply using a credit card, you should also be careful to pay off your credit card balance in a timely manner to avoid or reduce interest and other fees. Ideally, you should always pay off your credit card balance by the due date. Employing this strategy will ensure that credit card usage is most beneficial to you. Again, I advocate responsible credit card use.
Debit Cards
While debit cards don’t tend to have the same high-end benefits as credit cards they do have their place in a solid financial toolkit. Debit cards offer a layer of protection, albeit, it typically comes at an added cost. While they don’t come with as generous rewards as credit cards, some debit cards do include a cashback feature.
One of the newest debit cards actually has a cashback feature that rivals most basic debit cards. And, it is even a contender for many credit card cashback features. Coinbase recently launched a 4% cashback debit card for cryptocurrency holders who use this exchange. This is a great way to take advantage of cash features while adding crypto to your wallet. You can buy the USD coin at a 1:1 exchange rate with the US dollar without paying fees. This allows you to get the most out of this debit card.
Beyond security and rewards, debit cards have their practical use as well. And that is serving as a budget buffer. Debit cards are the equivalent of using cash. You can only spend what you have in your account and you don’t have to repay anything or worry about high interest rates. Thus, debit cards are perfect for individuals who have challenges with overspending when using credit cards.
While debit cards are not as “sexy” as credit cards, they still have their place in creating a successful money management strategy. They can be used as your primary cash alternative when making everyday purchases. I strongly advocate using a high-yield rewards debit card like Coinbase. You can make your money work for you even in the most mundane situations with this type of card.