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With more and more banks now issuing cash back debit cards, consumers have another question when it comes to personal finance: Should I get a cash back credit card or cash back debit card?
The answer — as with so many questions in the world of personal finance — varies from person to person.
Let’s explore the drawback and benefits of each type of card.
1. No interest charges. This is a big factor. With a cash back debit card, you will never incur interest charges because you are not borrowing money. You’re simply taking money out of your bank account — and earning money back for every dollar you spend. Good deal, right?
2. Protect your credit rating. If you are the type of person who sometimes spends beyond their means, you can’t get into credit trouble with a cash back debit card. Your bank may charge fees if you use your debit card without money in your account to cover your purchase — or your card may be declined — but this won’t affect your credit score.
3. No payments to make. With a cash back debit card, you don’t have to worry about making on-time payments at the end of the month. The money comes out of your account right away, and that’s it.
4. You can get one even if you have poor credit or no credit history. All you need to get a cash back debit card is a bank account that offers this option and money to pay the annual fee.
1. Annual fees. While many cash back credit cards have no annual fee, most cash back debit cards do. Most of the time, the money you get back will more than pay for your annual fee. But if you can manage your credit well, you’ll do better with a cash back credit card with no annual fee, like the Discover More card.
2. No good for emergency purposes. If an emergency arises and you don’t have money in your checking or savings account to pay for it, a cash back debit card does no good. Many people like to keep a cash back credit card on hand for emergencies. That $2000 transmission repair may sting a little less if you know you’re getting cash back on the purchase.
3. You don’t build your credit rating. While a debit card won’t hurt your credit rating — since you don’t have to make on-time payments — it won’t help you improve your credit score, either. If you are looking to build your credit, consider a cash back credit card.
1. No annual fee. You can find excellent cash back credit cards with no annual fee; all the money you earn from purchases is yours to keep.
2. Access to cash or credit for emergencies.
3. Build your credit rating with on-time payments while you earn cash back.
Drawbacks to Cash Back Credit Cards
1. You may not be eligible for a cash back credit card if you have poor credit or no credit history.
2. You may pay interest on purchases if you don’t have a zero percent interest rate or pay your balance in full within the grace period.
3. You can ruin your credit rating if you spend beyond your means and can’t make the minimum payments on your credit card.
This last factor — along with whether or not you qualify for a cash back credit card — should be the deciding factor in your choice between a cash back debit card or a cash back credit card.
If you can use your credit card responsibly, a cash back credit card is a great way to get money back on purchases, warranty protection, and a host of other benefits. If not, a cash back debit card is a great way to earn money back on everyday purchases.