By JENNA LEE
Just the mention of credit cards makes some people tense up. "Cash is KING!" they exclaim. Others swear by credit cards, even applying for them in bulk to take advantage of the rewards and other benefits. And still others think that debit cards rule, finding them the best of both worlds.
The reality is that, like most things in life, each payment option has its pros and cons. Which option is right for you? That's for you to decide. Read on for some points to help you figure out which best suits your needs:
- Can help build credit. Your credit card use is typically reported to the bureaus that maintain your credit history, so establishing a good record of timely payments and keeping your balances at a modest level are great ways to build a healthy credit score.
- Opportunity to earn rewards. One of the main reasons consumers like credit cards is because many offer rewards for using them like cash back, airline miles, sign-up bonuses and more. For those who pay their cards off in full each month (and never pay interest), these rewards can feel like getting paid to shop.
- Security. Credit cards typically offer stronger protection against fraudulent charges than debit cards. Thanks to the Fair Credit Billing Act, you're only liable for unauthorized purchases up to $50-- and many issuers may not hold you accountable for those charges at all. A stolen credit card doesn't lead someone directly to the cash in your bank accounts either.
- Insurances, warranty plans and other perks. To vie for your business, credit card companies often offer additional benefits. From auto rental insurance to price protection to warranties on big-ticket items, these little-known benefits are definitely advantages that credit cards might offer over other payment methods.
- Temptation to spend. Credit cards may not be the best option for those with shopping addictions or those who may feel the need to use their cards just because the credit is available to them. However, if you make a conscious effort to use your credit card like a debit card by not spending money that you don't have, you may be able to minimize your debt load.
- May negatively affect credit health. Both good and bad payment history can be reported to the credit bureaus, so mistakes like over-utilizing your card, not using your card at all and paying late can hurt your credit health.
- Can be expensive to use. Credit cards may come with late fees, annual fees and a variety of other charges, including interest if you don't pay your balance in full. Be sure you understand the terms of each of your cards, as they can be complicated.
- Easier to control expenses and avoid overspending. Because you're using your own money from your checking account to pay for your purchases (unless you overdraft), debit cards can feel more like "real money" and may help you control your spending. Compared to cash, it can also be an easier way to keep track of where your money is going-- just log into your online banking account and view your recent activity.
- Generally cheaper to get cash quickly. Unlike with credit cards, there's usually no need for a (potentially costly) cash advance fee. Using a debit card, all you generally need to do is find your bank's nearest ATM or ask for cash back with your purchases. Of course, you may also need to pay fees to get cash using a debit card in some situations, like when you use an out-of-network ATM.
- Some security. While the protections may not be as strong as with credit cards, the Electronic Fund Transfer Act limits your liability for unauthorized charges on a debit card depending on when you report the debit card as lost or stolen.
- Better exchange rate on foreign currency. While credit cards generally offer better protections against theft for those traveling abroad, debit cards may offer better rates if you need foreign currency. According to Lifehacker, when you use your debit card and hit the ATM, "you generally get the 'wholesale' exchange rate, which is reserved for interbank purchases, and superior to the exchange rate you'd get on your account statement if you just swiped your plastic."
- Few (or no) rewards. Debit cards don't usually come with cash back, price protection and other perks that credit cards offer. In most cases, you simply pay for your purchase without getting anything back.
- Overdraft fees. If you're not careful, you may spend more money than you have in your checking account and incur an overdraft fee. However, some lenders allow you to set up alerts to notify you by text or email when your balance is low, making fees easier to avoid. You can also set up account alerts through Credit Karma if you link an online financial account to your Credit Karma account and set up your monitoring preferences.
- Universally accepted offline. While some businesses only accept cash, you won't find many that only accept credit or debit cards. Paper money is the surest way to purchase small ticket items.
- Everyone can use it. In order to get a credit card, you need to apply for one and risk being denied. Even some checking accounts (and the debit cards linked to those accounts) may be hard to get if a consumer has a limited banking history or insufficient identification. With cash, you never have to worry about any of those issues.
- Easy to avoid overspending. With cash, once you run out, you can't use it to buy anything until you get more. Relying on cash can be a good way to ensure you live within your means.
- Can't use online. Many popular retailers like Amazon and eBay exist primarily online and require electronic payments-- if a product is only sold on an online site, you can't go to a physical store to buy it with cash.
- Doesn't establish credit history. Sometimes you may need to prove your creditworthiness to get what you want, such as when you're applying for that dream apartment rental. If you've only been making purchases with cash, you may run into some difficulties qualifying because cash purchases aren't reported to the credit bureaus.
- Can't be replaced if stolen. While many credit and debit cards have systems in place to offset fraudulent activity, there's usually no way to prove that your cash was yours. Once it's gone, it's probably gone.
No matter your preference, it's hard to deny that each payment option has its advantages. Choosing the "best" option is purely subjective. The good news is that you don't have to choose one and stick with it forever. Different options might be best for different situations. The choice is yours-- make it count!
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