What’s Smarter: Credit or Debit Cards?

Many people automatically assume that if you’re trying to save money, get out of debt, and improve your credit, debit cards are a smarter choice than credit cards. After all, credit cards pose the risk of insurmountable debt, while the worst that can happen with debit cards is an overdraft fee or two. But if you compare credit and debit, the answer isn’t as cut-and-dried as you may think. Credit cards have an important place in the financial ecosystem for people responsible enough to use them.

Let’s get one thing straight: If you are an impulse spender with a history of debt, steer clear of credit cards. The risk of credit card debt is real and serious. For everyone else, however, the benefits offered by credit cards — that you pay in full every month, of course — are significant.

Should you switch to credit cards? Here are three factors to consider.

Rewards, rewards, rewards.

True, some debit cards offer rewards these days, but credit card rewards are usually better. The cash value of your credit rewards will nearly always outweigh associated fees, if you have any at all. Why turn down free money?

Total protection.

Credit cards are clearly in first place when it comes to protection. While debit cards leave you liable for fraudulent expenses ($50 – $500, depending), most credit cards do not.

Improve your credit score.

Smart spending on your credit card will improve your FICO credit score, while spending on your debit won’t. This is because debit cards draw from funds you already possess — hence, there’s no credit or lending relationship to base a score off of.

So what’s the smarter choice? The answer depends on you. If you know for certain that you’re a responsible spender, credit cards might be a better choice because they reward you for spending and increase your credit score, which can save you big money when you make important purchases, like a car or a home. On the other hand, credit card debt should be avoided at all costs, so if you don’t trust yourself to spend smart, you’ll be better off sticking to debit.