Have you ever wondered about the uses of a credit card vs. a debit card? It’s likely you have both types of cards in your wallet at this very moment, and you’re given the option to choose one of themâsometimes in a matter of secondsâevery time you make a purchase. Still, you have lingering uncertainty about whether you’re making the best choice… and that same question pops into the back of your mind every time you buy something: “Should I use a credit card or debit card?”
Being uncertain about the difference between a credit card and debit card or the best time to use either is a common dilemma. The better you understand the benefits of eachâbeyond the fact they offer a way to access money without having to carry cash or a checkbook aroundâthe savvier a spender you’ll become.
Managing revolving credit vs. a bank account balance
Credit cards and debit cards both offer a convenient way to pay for things, but they work quite differently behind the scenes. As a result, they each appeal to different types of consumers, says Lou Haverty, financial analyst and founder of Financial Analyst Insider.
A credit card is a form of revolving credit. When you spend with your credit card you are borrowing, and you pay interest if you carry a balance, Haverty says. A debit card, by contrast, is linked to a bank accountâusually a checking accountâand the money is withdrawn as soon as you make the transaction, typically using a PIN.
A difference between credit cards and debit cards is that with a credit card, the exact amount you can spend depends on your credit limit and the balance you are currently carrying on the card, Haverty explains. If you have a $1,000 credit limit and a $600 balance from previous purchases, you can continue to charge an additional $400. If you’ve reached your credit limit, you won’t be able to use the card for more purchases until you pay off at least part of the balance. You owe a minimum payment each month.
When considering credit card vs. debit card, know that most credit cards carry an interest rate, expressed as an annual percentage rate (APR), which is essentially what you pay to borrow. You’ll have to pay interest on that $600 balance mentioned above if you carry the balance from month to month. âCredit cards require a responsible approach to your personal finances because you have the ability to spend beyond what you might have as cash in your bank account,” Haverty says.
A difference between credit cards and debit cards is that with a debit card, funds are pulled directly from the balance you have in the checking account to which the card is linked. In a traditional account setup, you can’t spend more than what you have in the account, which helps reduce the chance of racking up debt. If your account offers overdraft protection, you may be able to spend more than your account balance by leveraging funds from a different, linked bank account.
âCredit cards require a responsible approach to your personal finances because you have the ability to spend beyond what you might have as cash in your bank account.”
Knowing the requirements for each card
Another key difference between a credit card and a debit card is the criteria you’ll need to meet for each. âGetting approved for a credit card is usually dependent on your personal credit score. The higher your credit score, the more likely you are to be approved,” Haverty says. âIf you have a lower credit score, you may still get approved, but you might have a lower credit limit.”
Patricia Stallworth, certified financial planner and money coach, says that in addition to your credit history, factors such as your employment status could play a role in credit card approval.
When analyzing credit cards vs. debit cards, consider that a debit card is typically issued automatically when you open a checking account. This process usually requires some personal information, such as a Social Security number, driver’s license, employment information and valid email address. A deposit may also be needed to fund the account and complete the application. Then stay tuned for your debit card in the mail!
When should I use credit vs. debit?
While it’s easy to have credit card vs. debit card on the mind, there are some scenarios in which using either a debit card or a credit card could fit the bill, depending on your financial needs and goals. Use the outline below as a guide for when the question of “When should I use credit vs. debit?” comes up:
You’re new to using a card to make purchases. Until you know you have the discipline to control your spending with a card, a debit card could be the way to go, as it’s a great tool for ensuring you don’t charge more than you can afford. âDebit cards are great for everyday purchases that you have budgeted for because the money comes directly out of your account,” Stallworth says.
You want cash back without the fees. If your debit card is linked to a checking account that offers rewards, Stallworth says you may have rewards-earning potential without the hassle of fees. âWhile there is generally no cost to participate in debit card rewards programs, the costs and fees may be higher with some credit card programs,” she adds. For instance, Discover Cashback Debit charges no fees1 and allows you to earn 1% cash back on up to $3,000 in debit card purchases each month.2
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You have debt you can’t pay off. When should I use credit vs. debit? âIf you’re struggling to manage or get out of debt, a debit card should be your ‘go-to card,’” Stallworth says. “You can’t get out of debt if you keep charging.”
You want cash at the register. If you still like to have cash in your wallet, consider this difference between credit cards and debit cards: Most retail stores will allow you to get cash at the register when you pay with your debit card. âA credit card will most likely charge you a cash advance fee if that feature is available,” Haverty says.
“Debit cards are great for everyday purchases that you have budgeted for because the money comes directly out of your account.”
Use your credit card if…
You want product coverage. Some credit cards come with purchase protection, which makes them a great option for online and large purchases, Stallworth says. “If I have a dispute with a merchant, I have more leverage with a large credit card company behind me.”
You’re trying to build (or rebuild) your credit. âYou will need a single credit card with a small limit that you pay off in full each month to build a credit history,” Haverty says. A key difference between credit cards and debit cards is that debit card usage can’t help you build a credit history. A debit card can help you build strong budgeting skills so you’re better prepared to transition to a credit card.
You want to earn travel rewards. If you’re debating credit card vs. debit card and are focused on travel, consider that credit card rewards programs may offer robust rewards in a specific category, like travel, Stallworth says. While it’s always important to read the fine print (so you’re not paying more than you intend in fees or interest rate charges just to get rewards), you could find a credit card that offers opportunities to earn free flights and pay less for checked baggageâjust for using the card regularly.
How to use both cards to maximize your finances
Now that you understand which circumstances might be best to use a credit card vs. debit card, you can make the point-of-purchase decision of “When should I use credit vs. debit?” a little easier. It really depends on the goals you have laid out for your personal finances.
Get comfortable using both financial tools for their respective features. But be sure to stick to your budget, and don’t accidentally overspend from your bank account or charge more than you can afford to pay in full by your credit card’s monthly due date. When you learn to confidently use both of these cards to your advantage, you can enjoy all the various perks and protectionsâtimes two!
1 Outgoing wire transfers are subject to a service charge. You may be charged a fee by a non-Discover ATM if it is not part of the 60,000+ ATMs in our no-fee network.
2 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as Venmo® and PayPal, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries.
The post The Difference Between Credit Cards and Debit Cards: Explainedâââ appeared first on Discover Bank – Banking Topics Blog.
If you’re looking for a new bank account that allows you to easily store as well as access your cash, you might be thinking about opening a money market account or checking account. But how do you know which to choose? Decisions, decisions. Both types of accounts have unique advantages, depending on your savings and spending goals.
âThink about how you will be using the money within the account,” says Jill Emanuel, lead financial coach at Fiscal Fitness. “Is this money for daily, weekly or monthly use? Or is it money that will not be needed regularly?”
You’ll probably need a little more to go on before answering the question, “How do I decide between a money market account or checking account?” No worries. Our roundup delves into the features of both types of accounts to help you determine which one could be right for your financial plans, or if there’s room for both in your money mix.
Get easy access to your funds with a checking account
In simple terms, a checking account allows you to write checks and make purchases with a debit card from the money you deposit into the account. That debit card can also be used to withdraw cash from the account via an ATM.
When deciding between a money market account or checking account, Emanuel says most people use a checking account for the primary management of their monthly income (i.e., where a portion of your paycheck is deposited) and daily expenses (often small and frequent transactions). âA checking account makes the most sense as the account where the majority of your transactions occur,” she adds. This is because a checking account typically comes with an unlimited number of transactionsâwhether you’re withdrawing cash from an ATM, transferring money to a savings account or swiping your debit card.
While a checking account is a good home base for your finances and a go-to if you need to easily and quickly access your funds, this account type typically earns little to no interest. Spoiler: This is one key difference when you compare a money market account vs. a checking account.
âIf you plan to use your account for monthly bill payments and day-to-day transactions, you would be better suited with a checking account, as these support daily and frequent use.â
Grow your balance with a money market account
When you’re comparing a money market account vs. a checking account, think of a money market account as a savings vehicle that allows you to earn interest on the balance you keep in the account.
“A money market account is an interest-bearing bank account that typically has a higher interest rate than a checking account,” says Bola Sokunbi, certified financial education instructor and founder of Clever Girl Finance.
With some money market accounts, you can even earn more interest with a higher balance. Thanks to its interest-earning potential, a money market account can be the way to go if you’re looking for an account to help you reach your savings goals and priorities.
If you’re deciding between a money market account or checking account, you may think that a money market account seems like a typical savings account with your ability to earn, but it also has some features similar to a checking account. With a money market account, for example, you can withdraw cash from an ATM and use a debit card or checks to access money from the account. There are no limits on ATM withdrawals or official checks mailed to you.
Before you decide to use this account for your regular bills and your morning caffeine habit, know that federal law limits certain types of withdrawals and transfers from money market accounts to a combined total of six per calendar month per account. If you go over these limitations on more than an occasional basis, your financial institution may choose to close the account.
Don’t need regular access to your funds and want your money to grow until you do need it? Then the benefits of a money market account could be for you.
Deciding between a money market account or checking account
Still debating money market account or checking account? Here are some financial scenarios to help you determine which account may best suit your current needs and goals:
Go with a checking account if…
You want to keep your funds liquid. If you’re thinking money market account or checking account, know that a checking account is built for very regular access to your funds. âIf you plan to use your account for monthly bill payments and day-to-day transactions, you would be better suited with a checking account, as these support daily and frequent use,” Sokunbi says. Think rent, cable, utilities, groceries, gas, maybe that morning caffeine craving. You get the idea.
You want to earn rewards for your spending. When you’re comparing money market account vs. checking account, consider that with some checking accountsâlike Discover Cashback Debitâyou can earn cash back for your debit card purchases. The best part is you are earning cash back as you keep up with your regular expensesâno hoops to jump through or extra account activity needed. Then put that cashback toward fun things like date night, lunch at your favorite spot or a savings fund dedicated to something special.
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You want to deposit and withdraw without the stress of a balance requirement. If you do your research when comparing money market accounts vs. checking accounts, you’ll find that some checking accounts don’t require a minimum balance (or much of one). However, you may be required to maintain a minimum balance (and potentially a higher one) with a money market account in order to avoid a fee. If you’re accessing your money frequently and need to make large withdrawals, a checking account with no minimum balance requirement is a convenient option.
Go with a money market account if…
You want to earn interest. âIf your money is just sitting there, it should be earning money,” Emanuel says of the money market account or checking account question. âI spoke with a woman recently who told me she’d had around $50,000 sitting in her checking account for at least the last 10 years, if not longer. If that money had been in a money market account for the same period of time, she would have earned thousands of dollars on it. Instead she earned nothing,” Emanuel says.
You want to put short-term savings in a different account. If you have some short-term savings goals in mind (way to go!), you may benefit from keeping your savings separate from your more transactional checking account so you don’t dip into them for a different purpose. That whole out of sight, out of mind thing. âA money market account is the perfect place for money that will be accessed less frequently, such as an emergency fund [a.k.a. rainy day fund], a vacation fund or a place to park money after you’ve received an inheritance or proceeds from selling a home,” Emanuel says.
You need an account to fund your overdraft protection. If you’re comparing money market account vs. checking account, consider that a money market account could also cross over to support spending goals. One way is in the form of overdraft protection. If you enroll in overdraft protection for your checking account, for example, you could designate that funds be pulled from your money market account to cover a balance shortfall.
âA money market account is the perfect place for money that will be accessed less frequently, such as an emergency fund [a.k.a. rainy day fund], a vacation fund or a place to park money after you’ve received an inheritance or proceeds from selling a home.â
Using both accounts to achieve your financial goals
Speaking of crossover. Both spending and saving are vying for your attention, right? Consider leveraging both types of accounts if you have needs from the checking and money market account lists above.
“Personally, I use my checking account for bill payments, my day-to-day spending, writing checks and for any automatic debits I have each month,” Sokunbi says. She’s added a money market account to the mix “because of the higher interest rateâto store my savings for short-term goals, for investing or for money I’ll be needing soon,” she explains. Maybe it’s not about deciding between a money market account or a checking account, but getting the best of both worlds.
Before opening a money market account or checking account, do your research and compare your options to see which bank offers the best package of low or no fees and customer service, in addition to what you need from an interest and access to cash perspective.
The post Money Market Account or Checking Account: Which Is Best For You? appeared first on Discover Bank – Banking Topics Blog.
, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries.
