When should you use a debit card instead of a credit card?
Some people think debit cards are safer than credit cards by mistake, but it’s usually the other way around. Some don’t know that using debit cards to buy things won’t help them build the kind of credit score they need to get a car loan or a mortgage.
Is it always better to use a credit card? Or, are there times when a debit card is better? Let’s look at both sides of this argument.
Stats:
- In 2018, Americans made more transactions with debit cards than with credit cards (86 billion vs. 45 billion), but the total dollar value of credit card transactions was higher ($3.98 billion in credit card transactions vs. $3.1 billion in debit card transactions). (The Federal Reserve)
- 83% of Americans have at least one credit card. (The Federal Reserve)
- The average American has 3.84 credit cards. (Experian)
- 87% of Americans use a debit card. (Statista)
- There were 376 million open credit card accounts in the U.S. as of Q2 2022. (American Bankers Association)
Debit Card vs Credit Card: What’s the Difference?
Credit cards and debit cards have similar features such as money being deducted from your account when you use the card for a purchase, or cash withdrawals from an ATM.
However, their main difference lies in their financing methods. Credit cards allow you to borrow money from a financial institution and then pay it back with interest. Debit cards, on the other hand, are simply linked to your bank account and the funds are immediately taken out of your account when you use the card.
Credit cards are more beneficial if you are intending to make large one-off purchases and don’t have the necessary funds right away. It also allows you to enjoy rewards and promotions such as cashback and air miles. In addition, credit cards can help to build your credit score if used responsibly and regularly.
On the other hand, debit cards are best suited for everyday purchases because you are not putting yourself at risk of debt due to its direct link with your bank account.
With a debit card, you can spend money right from your checking account. With a credit card, you can borrow money and pay it back later, possibly with interest. When you swipe or tap your debit card, you’ll need to enter a PIN. For a credit card, you’ll need to provider your signature.
In 2018, debit cards were used almost twice as much as credit cards, according to the Federal Reserve’s 2019 Payments Study. However, credit card payments were worth nearly 30% more than debit card payments.
How Credit Cards Work
With a credit card, you can buy things now and pay for them later.
Most credit cards have revolving lines of credit, so you can either pay off your balance in full every month or carry a balance from month to month and pay it off over time. If you don’t pay off your credit card balance in full by the end of your grace period, interest will be added to the amount you still owe.
Credit cards have a unique 16-digit number that lets you make purchases quickly in person or online, as long as you haven’t reached your credit card limit.
Read more: See credit card bonuses here.
Credit Card Pros & Cons
| Pros | Cons |
|---|---|
| Help users build their credit score | It’s easy to get caught up in a cycle of debt |
| Users can earn travel or cash back rewards on purchases | Many credit cards come with high interest rates |
| There are built-in protections for theft or fraud | Some cards have annual fees |
| Pay off your payments over time rather than upfront | Worthwhile cards have strict approval requirements |
When To Use A Credit Card
Credit cards are flexible tools that let you borrow money, build credit, get rewards, and pay safely. But your credit score will go down if you don’t have the right habits and goals.
Below are a few situations where using a credit card may make the most sense.
Online Shopping
Want to learn how to shop safely online? Start by choosing stores like Amazon, Walmart, and Target that are known to be trustworthy. And when you buy from a small business, make sure the website is safe. Look for “HTTPS” at the beginning of the web address.
Then, try to pay for as many things as you can with credit cards. Since credit cards protect you from fraud liability in a way that debit cards don’t, it’s safer to buy things online with credit than with debit.
Want to make your online shopping even less likely to be a scam? You can add your credit cards to an online wallet. Putting your credit card information in a digital wallet might sound like a good way to get your information stolen, but virtual wallets actually make transactions safer.
Digital wallets of today use more than one type of security to make sure that your credit card number stays hidden when you shop online. Digital wallets make it hard for thieves to get your credit card information, for example, by giving you a unique token every time you shop.
Gas Stations
Some gas stations still don’t have EMV chip readers, so credit card skimmers can quickly get your information when you pay at the pump.
This makes gas station fuel pumps one of the riskiest places to pay. It can be risky to use your debit card instead of a credit card because it is directly linked to your bank account.
This is especially true when the card reader at the pump tells you to swipe your card instead of putting in the EMV chip.
To Improve Your Credit Score
Use credit cards instead of debit cards if you want to build your credit score.
Even if you don’t have a credit history, you can still get a credit card. You might not be able to get the best cards right away. You should use your credit cards in a responsible way by making payments on time and keeping your balances as low as possible.
A credit score of 750 or 800 doesn’t happen overnight, but showing potential lenders that you have good habits and are responsible can help you get a loan and lower your interest rates in the future.
To Earn Rewards
You’ll need a top rewards credit card if you want to get cash back, points, or miles on everyday purchases, plus extra perks like free access to airport lounges.
While cash back debit cards do exist, you won’t get as many rewards with debit as you will with credit. Cash-back debit cards only give you 1% cash back, but the best cash-back credit cards give you at least 1.5% cash back on all purchases and up to 6% cash back on popular spending categories.
How Debit Cards Work
Like credit cards, debit cards have a unique number that makes it easy to buy things quickly in person or online.
The main difference between debit and credit cards is that debit cards take money from a checking account that is linked to the card. With a debit card, you can’t buy something now and pay for it later.
Instead, the whole amount is taken out of your account right away. Your debit card purchase should go through as long as there is enough money in your checking account. Since you’re using money you already have, you don’t have to worry about going into debt.
Debit Card Pros & Cons
| Pros | Cons |
|---|---|
| You likely won’t pay any fees to use your card | You won’t earn rewards |
| It’s harder to overspend | Debit cards won’t build your credit score |
| You won’t pay high interest rates | Fewer fraud protections |
| Can withdraw cash at an ATM for no charge | Some debit cards still come with fees |
When To Use A Debit Card
Debit cards are a lot like cash. It means any money you already have, like the money in your checking or savings account.
When you compare credit cards and debit cards, here are some ways that debit cards might be better.
Read more: Extra (extra.app) Review: The Debit Card That Earns Rewards & Builds Credit
To Stay Out Of Debt
If you don’t want to ever have credit card debt, you can either pay off your credit card bill in full every month or make all of your payments in cash.
If you want to avoid getting into credit card debt, it can be smart to pay for everything with a debit card.
A debit card can keep you from spending more than you can afford if you are trying to stick to a budget. Many people who are trying to pay off old credit card debt choose to only use debit cards until their debt is paid in full.
When Withdrawing Cash
When you need to get cash from an ATM, debit cards are by far the best way to do it.
When you use your credit card’s limit to get cash, it’s a cash advance. The interest rate on a cash advance is much higher than the interest rate on a credit card purchase, and there’s no grace period. This means that interest will start to be added to that cash advance right away.
If you can use your debit card to get cash, do so. By going this way, you can avoid paying fees and interest that aren’t necessary.
If you can use an ATM that belongs to your bank, you probably won’t have to pay any fees.
To Avoid Interest Charges
The average interest rate on credit cards is high right now. This makes it very expensive to carry a balance on a credit card.
If you’re trying to pay off high-interest credit card debt, you should put your card away and use your debit card for now. But keep paying off your balance, or your credit score will drop.
Which Is Safer, A Debit Card Or Credit Card?
Both debit cards and credit cards have protections against fraud built in.
When you use a debit card at a grocery store or gas station, for example, you may be asked for a PIN. When you use credit to shop online, you’re often asked to enter the three-digit security code on the back of your card.
Banks and credit card companies are also always on the lookout for any possible fraudulent transactions. Most of the time, they will send you a text message as soon as they see strange charges or activity on your account.
Still, credit cards have some ways to protect you from fraud that debit cards don’t. Almost all of the best credit cards on the market today offer zero fraud liability on unauthorized charges. This means that if a charge turns out to be fraudulent, you won’t have to pay anything.
Debit cards also limit your liability for fraud, but you have to report a lost or stolen card within two business days for your liability to be limited to $50. If you report after two business days but before 60, your responsibility goes up to $500.
If only your debit card number is stolen and not the card itself, you are not responsible for any unauthorized charges as long as you report them within 60 days of getting your statement.
In general, credit cards protect you better from fraud. If someone steals your credit card information, for example, you have time to dispute the charge before you have to pay for it.
If you use a debit card, however, the money can be taken directly and quickly from your bank account. This makes disputing the charge and getting your money back a much longer process.
Bottom Line
If you use your credit card wisely and don’t buy things you can’t pay off over time, the benefits, such as more rewards and better protection against fraud, often outweigh the possible costs.
On the other hand, there are times when paying with a debit card can save you money, whether you’re trying to stick to a budget or stay away from credit card debt and interest charges.
As long as you pay your credit card bill in full every month, you can use it like cash, avoid interest charges and stay out of debt, all while building your credit and getting rewards.
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