Is Debit or Credit Better?

Before self-service payment card readers appeared in stores everywhere, cashiers would regularly ask, “Will you be paying with debit or credit?” But it’s still worth considering the question, since credit and debit cards work differently, despite their similar appearance.  

Many prefer to pay with credit, especially those who don’t know whether they have enough cash in their checking account, but the decision to hand over your debit or credit card really depends on the type of purchase you are making.

Let’s discuss the basic difference between these two types of payment cards and why you might want to use them for different types of purchases.

Debit or Credit: What’s the Difference?

Some people think credit cards are too great of a temptation and prefer to stick with debit cards or other alternatives. Others like the flexibility of credit cards and use them to accumulate rewards (like travel points or cash back) and build credit. Most of us carry at least one type of payment card. They’re more convenient than cash and checks, and the transaction shows up on your account soon after you swipe your card.

A generation ago, it wasn’t that unusual to be out at a movie with friends or at the register with a cart full of groceries and realize that you didn’t have enough cash with you to cover the bill. But today, you’d probably just pull out a debit or credit card and not think anything of it.

Though the two types of cards may be used interchangeably, there are some distinct differences between them.

Debit cards

Debit cards are linked to your bank account (most often a checking account), so the money you spend is automatically deducted from your balance. It’s a convenient alternative to cash and can help you stay within your budget. 

Unlike credit cards, your balance goes down with each debit card transaction, so this might deter you from overspending. Debit cards perform the same function as checkbooks, but just more conveniently.

In addition, using a debit card instead of credit may prevent you from racking up interest and late-payment fees, so you won’t hurt your credit score. Think of debit cards as a convenient method of paying cash, while watching out for overdraft fees and service charges.

Credit cards

Why use a credit card at all, if debit cards are so great? Well, there are several reasons why credit cards are attractive.

• You can spend more than you currently have and pay it back later (but approach with caution).

• If you are careful to pay your credit card bills promptly and in full, using a credit card can boost your credit score.

• Credit cards generally offer better rewards and consumer protection than debit cards do.

It’s best to use a credit card if you’re buying a big ticket item like electronics. The credit card purchase gives you purchase protections that a debit card doesn’t. For example, if you pay with your credit card, you can dispute the charge if there’s a problem with the product. The credit card company will pursue the issue with the retailer, and you won’t be responsible for the charge until the matter is settled. 

When you use your debit card, not only will the money be taken out of your account right away, but in many cases, you will be responsible for getting your own refund.

For most people though, using both a debit card and credit card in the course of normal purchases makes sense.

When to Use Debit or Credit

Here’s when you might want to lean on one type of payment over the other. 

Choose debit

Debit cards really shine if you’re trying to get better with money management and you’re carefully monitoring your checking account balance to ensure you don’t overspend. Remember, with a debit card, you’re spending your own money, rather than borrowing it from a credit card issuer. You’ll never pay interest on a debit card purchase, the way you might if you carry a credit card balance over from month to month. 

If you’ve been through bankruptcy or a debt settlement program, it might be a good idea to mostly stick to debit while you’re working to rebuild damaged credit. It could be more difficult to get approved for a credit card after debt settlement, and keeping your credit utilization low while you’re building your credit back up will help with the process. 

Another perk of debit cards is that since they link to your bank account, you can use them to take cash out of an ATM. While credit cards also offer this feature (it’s called a cash advance), it’s better to avoid using your credit card to take out cash—cash advance interest rates are higher than your credit card’s regular interest rate, and you won’t get a grace period like you do with purchases made using the card. Interest is charged on a cash advance right away. 

Consider credit

If you’re making a larger purchase and don’t have that much cash in your bank account (or don’t want to spend it all at once), you could opt to use a credit card. Just be sure you can afford to pay that purchase off entirely before interest is charged. 

Credit cards offer the chance to earn rewards on your purchases (which is increasingly rare for debit cards). Some credit cards pay a flat rate (like 2%) across all purchases, while some offer a higher rewards rate on certain purchases, like dining out, travel, or groceries. 

And unlike debit cards, credit cards offer the chance to build up your credit score if you’re careful to pay off purchases promptly and keep your credit usage low. The two biggest factors in determining your credit score are payment history and credit utilization (how large your balances are relative to how much credit has been extended to you). 

So if you pay your bill on time and in full (and preferably not just the minimum payments, which can be a debt trap—credit cards often charge interest rates of 20% or higher), you can build or rebuild your credit. 

Credit cards also give you better fraud protections. If someone steals your credit card, for example, you won’t be liable for the charges they make—many credit cards offer $0 fraud liability. 

Debit cards offer some fraud protection, but how much money you could lose hinges on when you report the fraud to your bank. Report it within two business days, and federal law limits your liability to $50. Between two and 60 business days, you could be liable for up to $500. After 60 days, you could be out all the money in your bank account. 

Debit and credit both have a place in most people’s wallets

Whether you choose debit or credit, the key is to use both of them in ways that support your financial goals and to not spend more money than you have. If you can do that, you’ll be able to fully enjoy the benefits each type of card provides.