Nearly 70% of millennials prefer debit to credit cards, according to a 2015 report from Chime, and Trans union reports they have fewer bank-issued and private label cards than older generations.
It’s understandable that they might be wary—credit card debt is a serious problem in the U.S., and it’s hard to dig yourself out of once you fall into it.
The credit industry is incredibly opaque and predatory. But a credit card is also an important tool that, when used responsibly, can help better your financial situation over the course of your life.
Here are some things to keep in mind about the differences between debit and credit cards.
Debit Cards
Pros:
• Money is taken out automatically, so it can make day-to-day spending more transparent.
• You can set up automatic transfers to your savings account.
• You can withdraw cash from an ATM or other vendor.
• Spending doesn’t affect your credit score.
Cons:
• It’s less secure than a credit card, especially for online purchases. Issuers refund fraudulent credit purchases much more quickly than debit purchases.
• If your card is stolen and it takes you “more than 2 business days after you learn about the loss or theft, but less than 60 calendar days after your statement is sent to you,” to report the theft, you could be liable for up to $500 in fraudulent charges.
• You can overdraft and have to pay the corresponding fee (the average is $33.38, per Bankrate).
• Spending can’t improve your credit score.
Credit Cards
Pros:
• Points, rewards, and cash-back add value to money you’d already be spending, and all the different types—travel, cashback, etc.—let you prioritize what matters to you.
• More secure than a debit card, especially for online shopping. The most you’re liable for is $50 after you report it stolen, thanks to the Fair Credit Billing Act (FCBA), and some companies will waive that.
• Easier to get refunds if your card is stolen.
• Can be used to build up credit score to help with borrowing—your payment history is the most important component of your FICO score (it accounts for 35%), but the length of your credit history (i.e. how long you’ve had a card) is also considered. This can save you thousands of dollars in lower interest rates when you’re borrowing for a house or car over the course of your life.
Cons:
• Easy to fall into debt if you overspend: The average household with credit card debt has balances of $16,883, according to NerdWallet.
• Difficult to compare and contrast every single type of card and how it can help (or hurt) you.
• Can hurt your credit score if you’re not careful with your spending.
• Many people are not knowledgeable about how to maximize their score, pay off their debt, or even what their interest rate is or how it works.
