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When should you use a credit card or debit card?

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When it comes to credit cards vs debit cards, is one better than the other? Each has its advantages, so it's useful to know when to use one over the other.

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Most people use a debit card for day-to-day spending and a credit card for bigger purchases. But have you ever thought about using your credit card more often? You might benefit from doing so.

How does a debit card work?

If you use a debit card to make a purchase, the money is taken directly out of your bank account. It’s a bit like you’re paying with cash and, if you regularly check your bank account, you’ll be able to easily see what you’ve spent when.

If your debit card gets lost or stolen, you’ll be able to cancel it immediately. Providing you haven’t acted negligently, you should get back any money that has been taken from your account. But you will need to inform your card provider as soon as you spot the fraudulent transaction. 

You’ll get some level of purchase protection too, but not as much as you’d get with a credit card. Some card providers use the Chargeback scheme which means you might be able to get some or all of your money back if the company you’ve bought from goes bust or your purchased item is faulty, for example.

If you pay with a debit card in a shop, you can either use contactless for amounts up to £100, or you can use Chip and PIN. You can also use a debit card to take cash out at an ATM.

What are the pros and cons of a debit card?

As with any financial product, debit cards have their pros and cons. Here are some examples.

There are no annual fees to payDebit cards don’t tend to come with the same rewards as some credit cards
They can be easy to apply forPurchase protection is more limited compared to a credit card
You’ll have some purchase protection under the Chargeback scheme if something goes wrongIf you use your debit card and it takes you into your overdraft, interest rates can be high
You can use debit cards to withdraw cash, usually fee-free
You can shop online, in store or over the phone

When is it better to use a debit card than a credit card?

It’s a good idea to think about when it’s best to use a debit card, rather than a credit card. For example, you might prefer to use a debit card in the following situations:

  • For small everyday purchases such as coffee or groceries

  • If you already have a lot of debt

  • If you want to keep track of your spending

How does a credit card work?

A credit card is a way of spending money you don’t have. You borrow the money and pay it back later – similar to a loan. 

But, unlike a loan, you’ll be given a credit limit, rather than a pre-agreed sum of money. You can spend up to that limit as and when you please. It might be a few hundred pounds, or it could be several thousand pounds.

When your monthly credit card statement arrives, you pay off the balance either in full or in part. You just need to make sure you at least make the minimum monthly repayment. Interest will usually be charged on any remaining balance carried over into the next month - unless your card offers an interest-free deal. 

Credit cards can also be used at ATMs to withdraw cash, but this should only be done in an emergency. As well as being charged a cash withdrawal fee, you’ll also be charged interest from the moment you get your cash (even if you pay off your balance in full that month), making it an expensive option. 

One of the biggest advantages of a credit card is that it provides purchase protection under Section 75 of the Consumer Credit Act. As long as your purchase costs between £100 and £30,000, you should get your money back if something goes wrong - for example, the item doesn’t turn up or the retailer ceases trading.  

What are the pros and cons of a credit card?

As with debit cards, there are both pros and cons of using a credit card:

You can spend more money than you have, helping you to pay for unexpected expenses, or spread the costThere's a risk of getting into unmanageable debt
Providing you use your card sensibly, you can improve your credit score over timeInterest rates can be high if you don't pay the balance off in full
They are convenient to use and widely acceptedYou might be tempted to buy items you don't need
You can sometimes get 0% interest introductory dealsCash withdrawals charge high fees and daily interest, much higher than your standard APR
Credit cards are safer than cash because if your card gets lost or stolen, you can cancel it.If you miss a payment or go over your credit limit, you’ll pay a fee and this could also affect your credit score
Purchases are protected under Section 75 of the Consumer Credit ActSome credit cards charge annual fees
You can take advantage of rewards or cashback schemes

When is it better to use a credit card than a debit card?

Thanks to the way they work, credit cards can be more useful than debit cards in certain situations. However, you’ll need to ensure you only ever spend what you can afford to pay back so that you don’t end up with a lot of debt you can’t repay.

Some reasons why you might chose to spend on your credit card rather than your debit card include:

  • To spread the cost – If you need to make a major purchase, such as a new washing machine or a holiday, you might not have enough money to pay up front. By using a credit card, you can spread the cost over several months - using a purchase card with a 0% deal means you can avoid paying interest for a number of months too. 

  • To take advantage of reward schemes  – Some credit cards offer cashback, enabling you to earn money back on your spending. Others offer rewards such as shopping loyalty points or airmiles. The more you spend, the more you’ll earn but most of these cards charge high rates of interest so it’s vital you repay the balance in full each month.

  • To build a credit score – If you need to improve your credit rating, using a credit card sensibly can help you to boost it. Once your credit score has increased, you’ll be able to qualify for better deals, lower rates and a higher credit limit.

  • If you need to protect your purchase – If you’re buying something between £100 and £30,000, you’ll get more protection if you use your credit card. Your credit card provider is jointly liable with the supplier for any faulty or substandard purchases. If the supplier goes out of business and you can’t get your money back from them, contact your credit card provider.

Fraud protection - If your credit card is used for fraud, you won't usually be liable for any unauthorised payments, providing you contact your provider as soon as you spot the transactions. Note that if your card is lost or stolen, you may be liable for the first £50 and if you’ve been negligent, you may not get the money back at all.

Remember that withdrawing cash using your credit card is extremely expensive. Read more about whether you should withdraw cash using your credit card.

Find the best credit card for you, whether you're looking for 0% card for balance transfers or purchases or day to day spending and rewards

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