Using credit cards has its benefits, but not without risk and room for error. Credit cards may provide more opportunity, as long as you maintain good financial responsibility. The alternative — debit cards — have limitations that can help deter mistakes.
As your teen starts to make independent financial decisions, education is paramount at this early stage about the advantages and disadvantages of using debit and credit. Not all plastic is created equal, and the following breaks down the pros and cons of credit and debit cards that can help benefit your family's finances.
The debit card is like modernized cash in plastic form. With each swipe of the debit card, funds are directly withdrawn from your checking account; you pay exactly what the item is worth and without additional interest or fees. Then you can immediately log onto your bank account to see your current checking account balance. And have you ever been turned down at a bar for buying one drink using a credit card? Anytime you use a debit card, there is never a minimum charge, and debit is generally accepted in more locations.
Win: Debit Card
Credit cards have a higher level of protection against fraudulent transactions (and many cards offer extended warranties and extra safeguards even against defective merchandise). Since funds aren't immediately withdrawn from your banking account, you have a better chance of getting your money back after fraudulent spending. Fraudulent charges using credit can be returned within 24 hours, whereas with a debit card, it could take up to two weeks for a bank to investigate and reimburse you. Also, personal liability for a debit card can be $500 or more, and the personal liability of a credit card can't exceed $50.
In the situation of a data breach, such as the massive Target data breach in 2013, credit cards carry their own risk of identity theft, unless you secure your information with credit monitoring. Keep in mind though, debit cards are more susceptible to skimming devices that capture information at theft hotspots like gas stations and ATMs — visible pin numbers can also create vulnerabilities.
Win: Credit Card
Credit cards that lead to financial disarray is mostly due to user error. Without good financial management and practice, debit cards are more budget-friendly because you can spend only money you actually have. A "buy now, pay later" mentality may entice you to spend more than usual. Using credit cards can become habit forming as you pay only the minimum payment, reach the card's limits and open new cards. Balances grow, interest builds, fees hit and healthy finances deteriorate as thousands of dollars accumulate on credit. If you want to prevent (or especially rectify) debt, swiping the debit card is the smarter choice that is absent the temptation for unaffordable instant gratification.
Win: Debit Card
Points, Rewards & Good Credit
The perks of using a credit card include rewards programs for earning cash back and points on redeemable purchases such as travel, merchandise and gift cards. Also, opening a credit card typically awards you with a large amount of bonus points that can equate to round-trip airfare or even $500 in cash.
If you pay off your balance every month and practice responsible spending within a budget, you can benefit from a wide array of credit rewards. The Points Guy offers valuable insight for how credit card users can maximize hard-earned loyalty points for traveling.
Aside from points, earning good credit is the top benefit of using a credit card. Good credit serves as a gateway toward a lower mortgage rate or buying a car, as well as qualifying for a mortgage or auto loan. Banks require "proof" that you'll pay your bills and pay them on time. Low-limit credit cards, charge cards (that require you to pay the total balance each month or you'll have to pay a penalty) and setting up payment reminderscan serve as training wheels toward effective credit spending.
Win: Credit Card