Debit or Credit?

Debit or Credit?
BY Tammi Huang
Oct 14, 2013
Key Takeaways:
  • Debit cards and credit cards look the same but they work differently.
  • Debit cards let you pay for things by withdrawing money from your bank account.
  • Credit cards let you pay for things by advancing the money and then you repay the card issuer.

Before the advent of the self-service payment card readers, cashiers would regularly ask “Will you be paying with debit or credit?”

When it comes to paying with plastic, there are debates about which one is better. 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.

We’ll explain the basic difference between these two types of payment cards and how 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 “freedom” of credit cards and use them to accumulate points and build credit. Regardless of which type, most of us carry at least one type of payment card. It’s more convenient than cash and checks, and the transaction shows up 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 so the money you spend is automatically deducted from your account. 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

So why use a credit card at all? Well, there are several reasons why credit cards are attractive.

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

  • If you are responsible with credit, you can use it to build up your credit profile

  • Credit cards generally offer better rewards and 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 a number of 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 makes sense.

When to use debit or credit

So, back to the big question: debit or credit?

You might go with the debit card or cash for smaller purchases (less than $20), but even small transactions add up so you’ll need to keep track of your usage. If it’s a larger purchase and you either don’t have the cash in your account or don’t want to deplete your cash at once, you may choose to use your credit card instead. This may be even more attractive if you’re earning rewards or airline miles through your credit card.

If you’re trying to build up your credit score by showing responsible use of your credit card, you may want to use it for those smaller purchases, too. Just make sure you pay your bill on time and in full (and preferably not just the minimum payments, which can be a trap). The credit card also will give you protection in case of fraud, the need for a refund, or other issues. But don’t reach for the credit card solely to put off payment, especially if you anticipate being charged interest for debt carried over to the next month.

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

Whether you use debit or credit, strive for good financial health

Learning how to deal with debt, money, and planning for your future doesn’t need to be complicated, but everyone can use a little help and encouragement. Our simple-to-follow guide will help you find the tools to help you move toward a better financial future. Get started today by downloading our free guide.