As interest rates have risen over the past sixteen months, customers with deposit accounts find themselves earning more from their cash reserves at their local bank. At the same time, borrowing account rates have also increased. This prompts the question: should we opt for credit or debit? Before you answer, let’s explore a few factors that can help you make an informed decision.
Capitalizing on Higher Interest Rates
The Federal Reserve has met consistently over the last year and a half to discuss interest rate changes to combat inflation. Traditionally, as interest rates rise, inflation declines, which has been the recent trend. The benchmark interest rate has shifted from 0% during the pandemic to approximately 5.0% today. On the other hand, inflation peaked at approximately 9% in September of 2022, but is now down to just under 5%. Consequently, you can expect cash reserves at the bank to yield over 4.0% in interest—a substantial increase.
Unlocking Rewards and Benefits
Credit card companies often entice customers with various reward programs. These rewards can range from airline miles and hotel discounts to cashback offers. While some cards require an annual fee, others provide cashback benefits without any associated costs. It's essential to conduct thorough research to identify the best card for your needs. By using a credit card strategically, you can take advantage of the 30-day grace period before paying off your monthly balance, keeping your cash reserves intact. However, it's crucial to pay your bill in full each month to avoid hefty interest charges—especially now that interest rate charges have reached levels as high as 29.99% on certain credit cards.
Enhanced Security Against Fraud
Nobody enjoys dealing with fraud, except for the fraudsters themselves. When using a debit card, if your card details are compromised, the fraudster can quickly drain your bank account, leaving you to navigate the arduous process of recovering your funds and reporting the fraud. In contrast, credit cards offer a buffer period between the transaction and the payment due date. This allows you to dispute fraudulent charges before dipping into cash reserves. Credit card companies also tend to be more proactive in detecting potential fraud, enabling you to address issues swiftly and efficiently.
Next time you find yourself at the checkout counter, consider the advantages of keeping your cash reserves to earn additional interest, all while instead using a credit card to accumulate rewards and safeguard your funds against fraud. Utilize credit wisely, paying off your balance each month, to make the most of the benefits and maintain financial stability. By understanding the intricacies of credit and debit usage, you can navigate the evolving financial landscape with confidence.
