Q: I charge a lot of stuff on my credit card, but I always pay off the balance every month. My fiancee uses a debit card so everything comes right out of her checking account. Are these pretty much different ways of doing the same thing, or is there an advantage to one or the other?
A: Either approach can work as a cost-free cash substitute, if you manage it correctly. Conversely, each approach has potential pitfalls. Here are three things that can make a difference in how well these approaches work:
- Record-keeping. Since debit card charges come directly out of your checking account, frequent debit card users need to maintain good record-keeping habits so they don't overdraft their account. Overdraft fees can turn a debit card into a very expensive way of accessing your money. On the other hand, using a credit card as a cash substitute also carries a record-keeping burden. Because the credit available to you may be more open-ended than simply what is in your checking account, the onus is on you to keep track of expenditures so you stay on budget.
- Fees. Both methods work better if your card is free of monthly or annual fees. With more debit cards now introducing these fees, your fiancee will want to keep an eye on this.
- Rewards. Rewards are an x-factor. You can use a debit or credit card as a cost-free cash substitute, so the rewards can make the difference as to which is more attractive. With some debit cards now phasing out their rewards programs, this may tip the balance more toward credit cards.
It's good to have this kind of conversation with your fiancee before you get married. It's even okay if you have different habits about how you manage your finances, as long as you agree on the same standards of responsibility, and work towards the same long-term financial goals.
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