Managing your finances is not just about taking care of where you spend your money but also about how you pay for things. Whenever you make a purchase you can use a Credit card, debit card or cash to make the payment. Using a card means that you borrow money from the bank. You either pay it back at the end of the billing cycle or pay interest on the outstanding amount. In case of a debit card the amount is straight away deducted from your savings account. Many a times you must have wondered which method is better between the two! Is there any “best” way of making payments?

Well it depends on several factors and your particular situation. Let’s see when this card payment suits your situation.

Rebuilding credit

A good credit score helps you get approved for loans easily. It also helps you secure a low rate of interest. But the only way you can build your score is by taking on debt. Since your card issuer reports the activities to the bureau using it for your routine expenses and then making timely payments will help in building credit. On the other hand using a debit card does not help in building credit in any way, since the activities on the debit card are not reported to the credit bureau. So if you are trying to establish a credit profile for the first time or rebuilding it, using a credit card for paying for your expenses is an effort in the right direction.

Earn rewards

Using a credit card often helps you earn reward points. For example many card issuers give travel or cash back rewards. So using your credit card regularly for purchases will help you rack up more points.

Fraud protection

Credit cards are a safe option if you are using them to shop online. Many card issuers have a zero liability fraud policy where you are offered protection in case your card is lost or stolen. You will not be held liable for any unauthorized charges. But in case your debit card is misused, you may lose everything in your account if you do not report the loss within a stipulated time period.

They are a good way to make payments for your purchases provided you pay the amount in full at the end of the billing cycle. The interest rates on outstanding balances usually run in double digits. So if you roll over the balance you will have to pay huge interest amounts. In that case it will not be worth using the credit card for reward points.
There are some situations where using a debit card makes more sense.

To control spendings- If you are an impulsive buyer then it is better to go shopping with a debit card. You will not be able to spend more than what you have, hence there will be an inherent limit to your spendings. But with credit cards you may be tempted to use your entire credit limit, which may be more than what you can afford to pay. Carrying balances to the next month would attract heavy interest charges and make your debts unmanageable. A debit card helps you stay with your budget.

Dealing with small business owners

It costs small business owners to process a credit card transaction. Since it cuts into their profit margin they may increase the prices accordingly to compensate for it. Hence sometimes paying using a debt card or cash may cost you a little less.

One must analyse one’s spending habits and chose the payment method accordingly.  If the high limit tempts you to spend more than what you can afford, a debit card may be a better option for you.  If you can control your spending behaviour, reward programs on credit cards will help you earn points on your purchases. If a CIBIL score check shows that you have a low score, you may use a credit card for your purchases as it helps in rebuilding your credit.

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