In the world of personal finance, choosing between credit cards and debit cards can significantly impact your overall financial security and your travel experiences.
How?
Well, if you’re using a debit card in your every day you’re not:
- Building Credit
- Earning Rewards (like for travel)
- Taking advantage of benefits like trip protection, rental car insurance, purchase protection, and much more.
You’re also not protecting your hard-earned money from fraud or billing errors.
Using a credit card to book travel can keep your cash flow available if you need it in a pinch. For example, if you stay at a hotel or book a rental car there is always a hold placed on your funds to cover incidentals.
This is regardless of whether you’re using a credit card or a debit card.
The difference is that if you use a debit card, that hold or security deposit is being held on your actual cash. But if you use a credit card, that hold is not on your money, it’s the credit card company’s money.
Why would you want to tie up your cash for no good reason?
I’m no financial advisor, but I’ve been researching and practicing travel rewards, points, and miles strategies since 2015.
I have over 12 credit cards (I only use a handful) with a credit score consistently over 830 with zero credit card debt. So, I know a thing or two about how credit cards can transform your life for the better.
In this post, we’ll discuss the key differences between debit and credit. You’ll learn why and how you should use credit cards for everyday purchases.
When you’re done with this post you’ll walk away with a better understanding of credit cards so that you can make an informed decision and enrich your life through travel without paying full price!
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Differences Between Credit Cards and Debit Cards
Before we dive into more details about why you should be using credit cards over debit cards, let’s talk about the key differences.
Debit Cards
A debit card is linked directly to your checking account, think of it as digital cash. When you make a purchase, the amount is deducted immediately from your bank account.
Compared to credit cards, debit cards typically offer fewer protections and rewards, but many people still use them because they don’t want to risk going into debt.
After all, with debit cards, you can’t spend more than you have in your account without paying overdraft fees.
Some debit cards offer incentives like cash back at 1%. That’s pretty pitiful when you could get at least 2x back when using credit cards.
Debit Cards Don’t Build Credit
You can’t build credit by using your debit card. Debit cards are linked to your checking account and simply use the money you already have available, so they do not report to credit bureaus or influence your credit history.
Many people don’t understand that if you want a good credit score, you need a way to build credit.
Why does credit matter?
Loan and Credit Card Approvals: A good credit score is crucial for getting approved for loans and credit cards. It’s how lenders know that you can be responsible and pay back the money borrowed.
Lower Interest Rates: A higher credit score can qualify you for lower interest rates on loans and credit cards, saving you money in the long run.
Renting Housing: Landlords look at your credit score to indicate whether you’ll be reliable with paying the rent. If you have a good credit score, you increase your chances of being accepted.
Insurance Rates: Many insurance companies use credit scores to determine auto and homeowners insurance premiums. A higher credit score could save you money!
Utility Services: Sometimes Utility companies check your credit score to determine whether they need a deposit and what that may be. It’s important to have your credit score in check or you’ll pay more.
If you want to build your credit score, a debit card will not help you with that. As you can see from the above, having a good credit score is very important for your financial health and can open up a lot of opportunities.
Are Debit Cards Safe to Use?
Debit cards are straightforward, and if you’re not financially disciplined they can help you manage your spending and your budget.
However, debit cards provide very little protection. When there’s a fraudulent charge or billing error the money is taken directly from your bank account and it can take days or even weeks before it’s back (if you get it back).
For most people, that can put unnecessary financial strain on us.
Plus if you don’t report it immediately you may not get all of your money back at all.
Recently, we stayed at an all-inclusive luxury ranch for $0 using points and miles. The cash price was $1,700/night making a 3-night stay over $5,000. Ouch.
As with all hotel stays, we needed to put a card down for incidentals. Thankfully, I used a credit card because after our stay we were erroneously charged $5,100!
I freaked out!
If we had used our debit card that money would have been deducted from my checking account. I don’t even keep that much money in my checking account! (I put it in a HYSA).
It took over a week for them to fix their mistake and refund that money!
So, yes you can use a debit card for travel, but as you can see, that doesn’t mean you should.
Credit Cards
Unlike debit cards, credit cards are issued by a bank or credit card company and allow you to borrow funds up to a predetermined limit to make purchases or withdraw cash.
You are then required to pay back the borrowed amount, either in full by the billing cycle’s due date or you can pay over time, but you’ll incur interest charges (we don’t want this).
Credit cards will give a grace period between the time you make the purchase and the payment due date which is typically between 20 to 30 days.
This is when you may get yourself in trouble if you’re not careful.
A grace period doesn’t give you permission to spend money that you don’t or will not have. Always be prepared to pay the statement balance in full by the due date.
Important Note: Credit Cards are not the same as Charge Cards. Charge cards have no preset spending limit, but you must pay off the balance in full every month.
American Express offers cards that have a flexible spending limit.
So unlike a traditional credit card with a set limit, the amount you can spend adapts based on factors such as your purchase, payment, and credit history.
Examples are the American Express® Gold Card and The Platinum Card® from American Express.
Since you should pay your statement balance off every month anyway, these cards are great if they offer amazing benefits like the above from American Express.
Are Credit Cards Safe to use?
Yes! Credit cards are absolutely safe to use if you do so responsibly.
I don’t even carry my debit card with me anymore. The fact is that credit cards are much safer and offer higher levels of protection than debit cards.
If you have a fraudulent charge or there’s a billing error, the money that is held up is not your own.
Yes, it could take days or even weeks to get everything resolved, but the good news is that there’s very little impact t0 you financially.
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How to Avoid Paying Interest Charges
When you think of credit cards, you may automatically think about going into debt, but it doesn’t have to be like that.
I don’t care about the %APR on my credit cards because I never pay interest.
Pay your Statement Balance in full and on time
Your statement balance is the total amount you owe on your credit card at the end of your last billing cycle, including all purchases, fees, and interest accrued up to that point (which you shouldn’t have).
This is the amount you need to pay by the due date to avoid interest charges.
On the other hand, your current balance includes all transactions made since your last statement closed, plus any remaining unpaid statement balance.
This number includes more recent spending and any payments or credits applied to your account.
When you go to pay your credit card, you are typically given 4 options:
- Statement Balance (this is the winner)
- Current Balance
- Minimum Payment (this will incur interest)
- Other amount
The payment type you want is “Statement Balance”. This will ensure that you never pay interest when using a credit card.
You can pay the current balance if you want and have the money, but I wouldn’t bother. It’s good to have a statement balance reported to the credit bureaus. It shows that you’re using your credit and they like that.
Keep Your Credit Utilization Low
So you have your credit card and you’re paying the statement balance in full and on time. Great!
But one of the high-impact factors determining your credit score is credit use or credit utilization.
Credit utilization refers to the percentage of your available credit that you’re currently using. It is calculated by dividing your total credit card balances by your total credit limits.
The lower your utilization, the better your credit score (when applying other best practices).
You want to keep your credit utilization below 30%. Mine is between 1-5% and my credit score is consistently over 830.
Some people think having fewer credit cards will improve their credit score, but this can actually backfire if they use a lot of their credit and don’t have much credit, to begin with.
Scenario #1: Let’s say you have one credit card with a credit limit of $1,000 and your statement balance is always $800. Your credit utilization would be 80% which is very high.
Scenario #2: On the flip side, if you had 5 credit cards with a combined credit limit of $5,000 and your total statement balance across all 5 credit cards equaled $800, your credit utilization would be only 16%.
Much better!
So, the person in scenario #2 has a better utilization strategy for maintaining or improving their credit score despite having 5 credit cards instead of only 1.
Why Credit Cards Offer Better Benefits for Travelers
We’ve talked about how credit cards offer more benefits and rewards than debit cards, but what does that actually look like?
There are different types of credit cards, but by far my favorite are the ones that earn you travel rewards and benefits.
Travel Rewards and Bonuses
Points and Miles: The travel rewards credit cards that I love the most will earn me points and miles which can be redeemed for flights, hotels, activities, and even rental cars.
My favorite types of points and miles are the ones that offer flexible redemption options, so I can transfer them to multiple airline or hotel loyalty programs.
There are so many ways to use points for travel, including roundtrip business class flights to Spain for under $300.
Cash Back: Some travel rewards credit cards offer cash back on travel purchases or broader categories. These are not as lucrative as points and miles but I have a couple in my wallet.
Favorable earnings rates: As I mentioned earlier, you’re lucky if your debit card gives you a measly 1% cash back.
My travel rewards credit cards earn me at least 1.5% back, but in most cases, I’m earning anywhere between 2%-5% in the spending categories I use the most.
Welcome bonuses: One of the best things about travel rewards credit cards is the welcome bonus offer when approved for a new credit card.
In many instances, earning just one welcome bonus can get you an almost-free flight or even a free hotel stay.
The lucrative welcome bonuses that come with applying will have some sort of minimum spending requirement. But I always make sure I have a plan to meet it with purchases that I was going to make anyway.
Travel Perks
On top of the fact that you can earn lucrative rewards to pay for travel, these credit cards can get you some pretty sweet benefits as well.
Travel Insurance: Complimentary travel insurance coverage is a great benefit. It can include trip cancellation, interruption insurance, and emergency medical coverage.
I love the Chase Sapphire Preferred® Card for this and it’s primary rental car insurance benefit.
No Foreign Transaction Fees: When traveling abroad, I only bring credit cards that don’t charge foreign transaction fees.
Your debit card likely charges foreign transaction fees ranging between 1%-3%. That’s ridiculous and so unnecessary.
Complimentary Airport Lounge Access: If you’re traveling through the airport a lot, you’ll love complimentary lounge access. These lounges can provide a comfortable space to relax or work.
The ones I’ve enjoyed have also offered complimentary food, drinks, and Wi-Fi. My go-to card for this benefit is the Capital One Venture X Rewards Credit Card.
On top of the travel perks, many of these credit cards may also include benefits like purchase protection, extended warranty, price protection, or access to exclusive events.
Things to Keep in Mind
Many credit cards that offer the best rewards and benefits will have an annual fee, but that’s not a deal breaker for me. Every year, I evaluate my credit cards to make sure the benefits outweigh the annual fee.
Using credit cards for everyday purchases should be part of an overall financial strategy.
I don’t recommend applying for credit cards willy-nilly and not having a plan for how you will be maximizing them.
Should you ever use a Debit Card?
Yes, there are times when using a debit card is the better choice.
I really do think that using credit cards for your everyday expenses can be the best strategy for you financially and if you love to travel.
However, when you’ve encountered a situation where you will be charged an extra fee for using a credit card it’s not going to make sense.
For example, when I pay my property taxes there’s a fee of 2.4% incurred for paying with a credit card. For this type of transaction, I could only earn 2% back which means I would be losing money by using a credit card.
Womp Womp.
The only time this could ever make sense is if you are working towards a new welcome bonus.
Almost all welcome bonuses will earn well over 3% back. But I would only do this if you can’t meet the minimum spending requirement any other way.
What Credit Cards do I recommend for Travel?
Now that you’ve learned why credit cards are the better and safer choice for your everyday spending, it’s time to figure out which one is right for you!
These are my top picks for travel rewards credit cards:
- Chase Sapphire Preferred® Card
- Ink Business Preferred® Credit Card
- Ink Business Cash® Credit Card
- Ink Business Unlimited® Credit Card
- Capital One Venture Rewards Credit Card
- Capital One Venture X Rewards Credit Card
You may also want to check out CardMatch™ to find the best offers available to you.
Bottom Line
The bottom line is that credit cards are overall going to be better for your everyday spending than a debit card.
They are safer to use and earn you more rewards and benefits.
But whether travel rewards credit cards are right for you is something that only you can answer.
Personally, credit cards have opened up a whole new world of travel for me and my family. My only regret is that I didn’t start sooner!
Other posts you may like:
- Are you eligible for business credit cards? Probably!
- Top things you should and shouldn’t do when approved for a travel rewards credit card.
- What is the 5/24 rule?
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