If you’re trying to decide whether credit cards for bad credit or debit cards are better financial tools for you, the answer is: it depends on how you plan to use them. It all boils down to whether you are trying to build credit and how responsible you can be with plastic.
When a bad credit credit card is better
Having good credit is important when it comes to getting approved for loans and housing, accessing reasonable loan and insurance rates and potentially even landing a job. When you are actively trying to boost your credit score, using credit cards for bad credit is one of the best ways to get there. These tend to have higher interest rates and lower credit limits than other credit cards, but they give people with poor credit the chance to improve their credit. Eventually, you should be able to qualify for a regular card with a lower interest rate.
Your credit card usage is reported to the major credit bureaus — Experian, TransUnion and Equifax — so when you take responsible actions like paying a bill on time or carrying a low balance, your credit score gets a lift. Credit cards also provide you with zero liability on unauthorized purchases if your card is lost or stolen, making them safer for online shopping than debit cards.
When credit cards for poor credit are the wrong choice
If you have trouble keeping your spending in check or find yourself relying heavily on a credit card to get through each month, you may be entering dangerous territory. Bad credit credit cards generally have high interest rates, so carrying a large balance can result in debt that’s hard to control. It’s smart to pay off your balance in full each month so you can build better credit without becoming reliant on a credit card to fund your lifestyle. If you can’t do this, a credit card may be the wrong choice for you.
Are you prone to credit card misuse but need to build credit? One strategy could be to remove your card from your wallet and set up a monthly bill like Netflix or your cellphone to automatically charge your credit card. Then pay it off immediately each month. This will show a strong history of on-time payments, which will improve your credit, but make it harder for you to get into trouble with credit cards.
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When debit cards are better
Some people struggle to control their spending with credit cards. If you find yourself relying too much on a credit card or struggling with debt, you may be better suited to a debit card, which limits your spending to the amount of money in your checking account.
When debit cards are the wrong choice
If your financial goal is to build better credit, a debit card won’t help. Unlike credit cards, debit card activity is not reported to the credit bureaus, so you won’t get any kudos for good behavior. Debit cards are also not as safe as credit cards for online shopping because you may have some liability for unauthorized purchases. Credit cards, on the other hand, offer zero liability for any fraudulent expenses.
Credit illustration via Shutterstock.