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Credit Cards Vs Debit Cards – Which One is Best?
In general, credit cards are better for purchases. They offer more protection against fraud, are linked to your bank account, and are often associated with better credit scores. On the other hand, debit cards do not impact your credit history.
However, if you use them to pay for everyday items, credit cards are the better choice. You’ll also get a variety of additional protections, like overdraft protections and purchase guarantees.
Prepaid debit cards aren’t linked to a bank account
While most prepaid debit cards are not linked to a bank account, some are.
These cards are linked to a savings account, which allows cardholders to withdraw cash whenever they need it.
While this does come with a fee, prepaid cards are convenient to use because they don’t require a bank account to be registered. And, many prepaid cards are backed by major companies, such as MasterCard or Visa.
If you’re unsure whether a prepaid debit card is right for you, read the following tips for choosing one.
A prepaid card will not allow you to overspend, but the same holds true for a bank account-linked debit card. Prepaid cards don’t allow you to overspend, but you can overspend on a bank account-linked debit card if you opt in to an overdraft program.
In that case, you’ll likely have to pay an overdraft fee and repay the amount. Fortunately, there are new federal rules that protect consumers using prepaid cards.
They don’t carry all of the same protections as regular debit cards
A major difference between credit cards and regular debit cards lies in the protections offered to users.
While a credit card can offer the same protections as a debit card, it doesn’t come with as many of these protections. As a result, you might not be able to get reimbursed for a fraudulent charge. Also, the unauthorized charges on your debit card could delay your payment, which can have serious ramifications for your credit score.
Debit cards are linked to checking accounts. Because you’re using them to make purchases, you risk overdrawing your account and incurring overdraft fees.
Debit cards don’t report activity to the major credit reporting agencies, so if you’re concerned about overdrawing your account, you can choose to turn off the overdraft consent on your debit card.
If you don’t want to allow your debit card to overdraw your account, consider opening a second checking account, one that’s funded solely for debit card activity.
They don’t build credit history
Although credit cards are the easiest way to establish a good credit history, they aren’t the only option. They are also hard to qualify for, and people who are still working on their credit history may find it difficult to secure one.
In addition to credit cards, a good credit mix should also include an installment loan account, which makes up 10% of your overall credit score.
If you have no credit history at all, you can build it over time with a secured card or by adding an authorized user to someone else’s card.
While credit cards are great tools for building credit history, you should avoid opening too many. It can be tempting to use your cards for shopping and dining, which will damage your credit.
Instead, use them to make your payments on time, and don’t spend more than you can afford. A credit card may not build a history overnight, but it can help you make payments on time and keep your credit score in good standing.
They can lead to overdraft fees
Overdraft fees are charges that a consumer may incur when they overdraw their checking account. Overdraws occur when a consumer makes a purchase or payment on a debit card when there is not enough money in the account to cover the transaction.
The financial institution pays the transaction and then requires repayment of the account deficit. Overdrawing an account is possible through several means, including ATM transactions, checks, debit card purchases, and automatic bill payments or direct debits from lenders.
In addition to avoiding overdraft fees, debit cards are linked to checking accounts. Poor balance monitoring can cause a debit card to overdraw, resulting in an overdraft fee. Fortunately, there is an option to opt out of overdraft consent. Otherwise, your card will decline purchases.
However, debit cards do not build a credit history and cannot be used as a primary form of payment for debt.
They are riskier than credit cards
It is true that a debit card is riskier than a credit card, but the liability for unauthorized purchases is much lower. Under federal law, banks and other card issuers are only liable for 50 cents for unauthorized charges, and the four major credit card companies have zero liability policies.
Nevertheless, debit card fraud can cost you up to $500, so it is best not to carry one in your wallet.
Although debit cards are riskier than credit cards, they have their own advantages and drawbacks. The biggest advantage is that credit cards have better fraud protection. They can double your purchase warranty when you purchase something on a card.
However, a disadvantage of credit cards is that they can lead to overspending. And if you don’t pay your bills on time, you can accumulate a significant amount of debt.
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