While not big proponents of using credit cards – especially when you are just starting out or have poor money management skills – there are times when it makes sense to use credit vs paying with a debit card (which takes money right out of your bank account).
When it comes to using credit cards – it's always best to be on top of your balance and be paying it off every month. When I was just out of college – my first big money mistake was carrying a lot of credit card debt. There's nothing worse than paying interest rates on unsecured debt. If you do have a lot of debt – one thing you can do be on the lookout for interest free credit cards and transfer the balances to avoid monthly interest rates. A word of caution: those balances will likely balloon after a period of time and you'll be stuck with a super high interest rate. I did this for awhile when I was getting myself out of debt (transferring from one zero interest account to another) – but it is not something you want to practice, long-term. Also, note there may be fees associated with transferring balances.
Generally, my wife and I use only cash and debit cards to pay for things. This works well for us because everything is coming out of one account and I don't have to be tracking or managing other accounts. But sometimes – it just makes sense to pay with credit card.
Here's a few guidelines to consider when deciding on whether to use credit or debit:
Will the purchase exceed the spending limit?
Many debit cards have a daily spending limit which you cannot exceed. If you are contemplating a larger purchase – and have a higher limit on your credit card vs your debit card – it's a good time to pay with credit.
You want to take advantage of the rewards
I will generally use my credit card to maximize a reward. In the case of my Discover card – they have monthly reward programs for using your card for a certain category. Often I will use the card when I want to take advantage of those rewards.
As many of us already know, when using a debit card, the cash is immediately taken out of our bank account. Such is not the case with the credit card. This offers a user greater protection against unauthorized use and can give you better recourse for disputing an unwanted charge.
Helps to build credit history
If you are attempting to build or re-build your credit score, using a credit card will count towards this goal. So by making your monthly payments on-time and consistently, you'll improve your score.
Making a larger purchase?
I will often place larger purchases on my credit card than I would with a debit card. There are a couple reasons for this:
- I like that I will get more rewards with the purchase going through the credit card
- Being it is a larger purchase, I sometimes like the ability to pay for it over a period of time and prefer not to draw down my bank account balance
- Some credit cards, like the Costco American Express card will double the warranty on an item purchased with it
Are there other benefits you see to using a credit card vs. paying with debit?