Is it better to use a credit card or debit card? Credit and debit cards usually look almost identical, with 16-digit card numbers, expiration dates, magnetic strips, and EMV chips. Both can make it easy and convenient to make purchases in stores or online, with one key difference. Debit cards allow you to spend money by withdrawing money that you have deposited at the bank. Credit cards allow you to borrow money from the card issuer, up to a certain limit, to buy items or withdraw cash.
You probably have at least one credit card and one debit card in your wallet. It’s hard to beat the comfort and protection they offer, but they have key differences that can seriously affect your wallet. So you can decide which ones to use to meet your spending needs.
Is it better to use a credit card or debit card? Key Points
- Credit cards give you access to a line of credit issued by a bank, while debit cards withdraw money directly from your bank account.
- Credit cards offer consumers better protection against fraud than debit cards that are linked to a bank account.
- Newer debit cards offer more credit-card-like protections, while many credit cards no longer charge an annual fee.
- When comparing credit cards to debit cards linked to a bank account, it’s important to consider the costs and benefits.
What is a credit card?
A credit card is a card issued by a financial institution, usually a bank, that allows the cardholder to borrow money from that institution. Cardholders agree to return the funds with interest according to the institution’s terms and conditions. Credit cards are issued in the following categories:
- Standard cards only offer their users a line of credit for purchases, fund transfers, and/or cash advances, and they often have no annual fee.
- Premium cards offer perks like concierge services, airport lounge access, access to special events, and more, but they typically have higher annual costs.
- Reward cards offer customers cashback, travel points, or other benefits based on their spending.
- Balance transfer cards have low introductory interest rates and fees for transferring balances from another credit card.
- Secured credit cards require an initial cash deposit held by the issuer as collateral.
- Charge cards do not have a preset spending limit, but often do not allow unpaid balances to be carried over from month to month.
- Credit card users can receive money, rebates, travel points, and many other benefits that are not available to debit cardholders by using award cards. Rewards may be applied at a flat rate or tiered. For example, you might have one card that offers unlimited two miles per dollar on purchases and another that offers three miles per dollar on travel expenses, two miles per dollar on dinner, and one mile per dollar on everything else. You can then use accumulated miles to book future travel arrangements.
- When choosing award cards, pay attention to whether awards can expire and what options you have to redeem them.
Benefits of using credit cards
Credit cards can offer certain advantages over debit cards, but they can also have some disadvantages. Here’s a closer look at the pros and cons of spending with credit cards.
Build credit history
Credit card usage is reflected on your credit report. This includes positive histories, such as on-time payments and low loan utilization rates, and negative items, such as late payments or arrears. Your credit information is then used to calculate your creditworthiness. Responsible donors can increase their score with a history of spending and on-time payments, and by keeping their card balance low relative to their card limits.
Many credit card companies offer free credit monitoring and tracking as a bonus with the card so you can keep track of the progress of your credit building.
Guarantee and purchase protection
Some credit cards may also offer additional warranties or insurance for items purchased beyond what the retailer or brand offers. For example, if an item purchased with a credit card becomes defective after the manufacturer’s warranty has expired, it’s worth checking with the credit card company for coverage. Or you can have built-in purchase and price protection to help you replace stolen or lost items, or refund price differences if the item purchased is sold cheaper elsewhere.
Fraud Protection
As long as the customer promptly reports the loss or theft, their maximum liability for purchases made after the card’s disappearance is $50. The Electronic Fund Transfer Act offers debit card customers the same protection against loss or theft, but only if the customer reports this within 48 hours of discovery. After 48 hours, cardholder liability increases to $500; after 60 days there is no limit.
Credit cards offer much better fraud protection than debit cards in most cases.
More credit card benefits
- The Fair Credit Billing Act allows credit card users to dispute unauthorized purchases or purchases of goods that have been damaged or lost in transit.
- If the item was purchased with a debit card, the charge cannot be reversed unless the merchant agrees. In addition, victims of debit card theft do not receive their money back until an investigation has been completed.
- The credit card holder, on the other hand, is not responsible for the disputed fees; the amount is usually deducted immediately and reinstated only when the dispute is withdrawn or settled in favor of the merchant. While some credit and debit card issuers don’t offer liability protection to their customers, the law is much more lenient for credit card holders.
- If you need to rent a car, many credit cards offer some form of collision waiver.
- Even if you choose to use a debit card, many car rental companies require customers to provide credit card information as a backup. The only way out for a customer might be for the rental company to put maybe a few hundred dollars on a debit card as a deposit.
Disadvantages of using credit cards
The main disadvantages of using credit cards are debt, credit impact, and fees.
Spending can lead to debt
When you shop with a credit card, you’re spending the bank’s money, not your own. This money must be paid back with interest. You must pay at least the minimum monthly amount owed. When you accumulate large balances on multiple cards, it can be difficult to keep up with monthly payments and strain your budget.
Impact on creditworthiness
Paying your bill on time and having a low credit card balance can help your FICO scores. However, credit card abuse can affect your credit score if you develop a habit of paying late, maxing out one or more of your cards, closing older accounts, or applying for new credit too often.
Set up credit card alerts to notify you of expiration dates and card balances, so you can pay on time and stay within your credit limit.
Interest And Costs
Because a credit card is essentially a short-term loan, you have to pay back your expenses with interest. The lending company’s interest rate and fees are used to calculate your Annual Percentage Rate (APR). The higher the card’s APR, the more it costs you to maintain the balance month-to-month.
You should be aware of whether your card charges an annual fee, a foreign transaction fee, a transfer fee, an advance fee, a late payment fee, or a chargeback fee. As a rule of thumb, the better a credit card rewards program and the more benefits it offers, the higher the annual fee.
What is a debit card?
A debit card is a payment card used to take payments directly from a consumer’s checking account, rather than being borrowed from a bank or card issuer. Debit cards offer the convenience of credit cards and much of the same consumer protection when issued by major payment processors like Visa or Mastercard.
There are two types of debit cards that do not require the customer to have a checking or savings account, as well as one standard type.
Standard debit cards draw on your bank account.
Electronic benefits transfer (EBT) cards are issued by state and federal agencies to allow qualifying users to use their benefits to make purchases.
Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was preloaded onto the card.
Frugal consumers may prefer to use debit cards because there are usually few or no associated fees unless users spend more than they have in their account and incur an overdraft fee. (The no-fee advantage does not hold for prepaid debit cards, which frequently charge activation and usage fees, among other costs.) By contrast, credit cards generally charge annual fees, over-limit fees, late payment fees, and a plethora of other penalties, in addition to monthly interest on the card’s outstanding balance.
Pros of Using Debit Cards
Debit cards can have upsides and downsides, just like credit cards.
Avoid Debt
A debit card draws on money that the user already has, eliminating the danger of racking up debt. Retailers know people usually spend more when using plastic than if they were paying cash.
By using debit cards, impulsive spenders can avoid the temptation of credit and stick to their budget. This can help keep you out of high-interest debt.
Fraud Protections
In the past, credit cards offered far greater fraud protection than debit cards. Some debit cards—particularly those issued by payment processors, such as Visa or Mastercard—are starting to offer more of the protections enjoyed by credit card users.
The key is reporting fraud or theft as soon as you realize it has occurred. Your liability for fraudulent purchases is determined by the time frame in which it’s reported. Waiting too long to let the bank know that your card has been used for unauthorized purchases could result in you being held responsible for some or all losses.
Since a debit card is linked directly to a bank account, fraudulent purchases can quickly drain an account dry or lead to an overdraft. This cannot occur with credit cards since those are paid back at a later date.
No Annual Fee
Though many credit cards charge an annual fee, debit cards don’t. There’s also no fee for withdrawing cash using your debit card at your bank’s ATM. Credit cards, on the other hand, can charge a cash advance fee plus a steep interest rate for that convenience. However, you may pay other fees to maintain your checking account.
Cash advances from a credit card don’t have a grace period; instead, interest begins accruing right away.
Cons of Using Debit Cards
Similar to credit cards, the biggest downsides of using debit cards involve credit score impacts and cost.
No Rewards
Unless you have rewards checking account, you won’t earn any points, miles, or cash back on purchases made with your debit card. Because rewards can save you money, depending on how you redeem them, you could be missing out if you only spend with a debit card.
Won’t Build Credit
Building good credit means demonstrating to lenders that you can responsibly repay the money that you borrow. When you’re spending with a debit card linked to your bank account, you don’t have the opportunity to do that, so using a debit card alone won’t help you establish or build a credit history.
Fees
Though debit cards don’t have annual fees, you may pay other fees to have a checking account. Those can include monthly maintenance fees, overdraft fees if you overspend from your account, returned-item fees, and foreign ATM fees if you use your debit card at another bank or financial institution’s machine.
What is the difference between a credit card and a debit card?
You can easily use a debit card and a credit card online. Although credit and debit cards have similar features, they work differently. Let’s take a look at the following main differences between them:
Credit Limit –
- Credit cards have monthly credit limits that you cannot over-exploit because you are borrowing money from the issuer or bank.
- With debit cards, there are no monthly credit limits as you spend your savings from your bank account.
Funding Source –
- With credit cards, the money is borrowed from the bank or the credit card issuer.
- With debit cards, the money comes from your savings in your bank account.
Cash Withdrawals –
- ATM withdrawals are taxable for credit cards.
- ATM withdrawals are not taxable for debit cards.
Interest Rate –
- With credit cards, you can enjoy interest-free credit for up to 50 days.
- Debit cards do not accrue any interest at all.
Purpose of use –
- Credit cards can be used in all online shops and points of sale.
- Debit cards are not always valid for certain online portals and websites.
Annual Fee –
- Credit cards may or may not have an annual fee.
- There is no annual fee for debit cards.
Eligibility Criteria –
- Credit cards require you to meet various eligibility criteria such as monthly income, credit rating, area of residence, etc.
- No eligibility criteria are required for debit cards. All you have to do is have a bank account with a certain minimum balance.
10 Reasons to Use Your Credit Card
Personal finance experts spend a lot of energy trying to prevent us from using credit cards—and with good reason. Many of us use credit cards irresponsibly and end up in debt. However, contrary to popular belief, if you can use plastic responsibly, you’re much better off paying with a credit card than with a debit card and keeping cash transactions to a minimum. Let’s examine why your trusty credit card comes out on top, and certain credit card uses and strategies to employ.
1. One-time bonuses
There’s nothing like a first bonus chance when buying a new credit card. Often applicants with good or excellent credit can be approved for credit cards that offer bonuses of $150 or more (sometimes much more) if they spend a certain amount (from $500 to several thousand dollars) in the first few months. The account has been opened.
Other cards offer bonus points or miles that can be redeemed for travel, gift cards, merchandise, bank statements, or checks (more on this below). A standard debit card that comes with a bank account, on the other hand, generally offers no initial bonus or ongoing opportunity to earn rewards.
2. Money back
The cashback credit card was first popularized in the United States by Discover, and the idea was simple: use the card and receive 1% of your purchases in cash back. Today the concept has grown and matured. Now, some cards offer 2%, 3%, or even 6% cash back on select purchases, although such lucrative offers come with quarterly or annual spending limits.
The best cashback cards are cards that charge minimal fees and interest while offering a high reward percentage.
Some cards, like the Fidelity Rewards card, offer a hefty 2% cashback bonus on all spending, but you must deposit your money directly into a Fidelity investment account.
3. Reward Points
Credit cards are set up so that cardholders can earn one or more points for every dollar spent. Many rewards credit cards offer bonus points for specific spending categories, such as dining, groceries, or gas. When certain income limits are met, points can be redeemed for travel, store, and restaurant gift cards, or merchandise through the credit card company’s online rewards portal.
Your options for credit card rewards are almost endless. Get a co-branded card offered in partnership with a hotel chain, clothing retailer, or even a non-profit organization like AARP, and you can use your daily spending to earn valuable rewards every day.
The trick is to find the card that best suits your spending habits. Doing the opposite – matching your spending patterns to a specific card – can be counterproductive. But if you’re already a regular spender at a particular retailer or have an affinity with a particular hotel, then why not use the card that will boost your further business by offering you enhanced rewards, discounts, and perks?
4. Frequent Flyer Miles
That benefit predates almost the rest. In the early 1980s, American Airlines began offering customers a new way to earn frequent flyer miles even when they weren’t flying, through a partnership with credit card giant Citibank.
Now all domestic and international airlines have offered at least one credit card in a similar partnership with major credit card issuers.
Cardholders generally earn miles at a rate of one mile for every dollar on net purchases, or sometimes one mile for every two dollars spent for cheaper cards with no annual fee. The value of this award depends on the type of flight ticket you buy with your points or miles. Frequent flyer cards are greatly enhanced by their mileage-based introductory awards. These are often enough to get you 50-100% of the way to an award flight after you’ve met the card’s initial spending requirement.
5. Security
Paying by credit card makes it easier to avoid fraud losses. If your debit card is used by a thief, the funds will be removed from your account immediately. Legitimate expenses for which you have scheduled payments online or mailed checks can fall behind, causing insufficient funds to be billed and affecting your credit score. Even if it’s not your fault, these late or missed payments can affect your credit score.
It may take a while for fraudulent transactions to be reversed and funds returned to your account while the bank investigates.
However, if your credit card is used fraudulently, you won’t lose any money – you must notify your credit card company of the fraud and not pay for the transactions you didn’t make while the credit card company investigates the matter.
Credit card networks like Visa and Mastercard do not offer liability coverage for unauthorized purchases to encourage the use of their cards by cash or check.
Credit card companies can also help resolve refund issues when consumers are unable to resolve disputes with merchants themselves.
6. Keep Sellers Honest
Let’s say you hire a tiler to lay a floor covering in your hallway. Workers spend the weekend cutting, measuring, grouting, installing the spacers and tiles, and letting the whole thing cure. They then charge you $4,000 for their troubles.
You withdraw your savings account and write a check. But what to do if 72 hours later the tile starts to shift and the grout still hasn’t hardened? Your performance is a complete mess now and that vein in your forehead won’t stop beating.
You can raise the issue with your state licensing agency, but that process can take months and the contractor still has your money. So if you can, pay for a ticket as big as this with a credit card. The issuer has an incentive to prevent fraud from their suppliers and if there is a problem they have a mechanism to fix it. More importantly, if you dispute the charge, the card issuer will withhold the money from the tiler, and not only will you get your money back, you can even get help finding a new contractor.
7. Grace Period
If you make a debit card payment, your money will be used up immediately. When you make a credit card purchase, your money stays in your checking account until you pay your credit card bill.
Holding on to your money for that extra time can be beneficial in two ways. First, the time value of money, no matter how small, saves you money. Delaying the final payment will make your purchase a little cheaper than it otherwise would be. Additionally, your money spends more time in your bank account when you pay with a credit card instead of your debit card, cash, or check. And if you pay your credit card from an interest-bearing checking account, you’ll make money during the grace period. The extra money eventually adds up to a reasonable amount.
Second, if you consistently pay with a credit card, you don’t need to keep a close eye on your bank account balance.
8. Insurance
Most credit cards automatically come with various consumer protections that people don’t even know they have, such as:
9. Universal acceptance
Certain purchases are difficult to make with a debit card. If you want to rent a car or stay in a hotel room, it’s certainly easier if you have a credit card. Car rental companies and hotels want customers to pay with credit cards as this makes it easier to charge customers for damage to a room or car. Another reason is that the merchant doesn’t know the final amount of your transaction unless you’ve prepaid your rent or hotel stay. The trader, therefore, needs to lock up a certain amount of your available credit limit to protect themselves from potential charges that they didn’t anticipate.
So if you want to pay for one of these items with a debit card, the company might insist on putting a few hundred dollars into your account.
When traveling abroad, merchants will not always accept your debit card, even if it has a large bank logo on it.
10. Building Credit
If you don’t have the credit or are trying to improve your credit score, using a credit card responsibly helps, as credit card companies report your payment activity to the credit bureaus. However, using a debit card will not appear anywhere on your credit report and therefore cannot help you build or improve your credit score. Even if you have to deposit some money to get a secured credit card, it can help you build your credit history and eventually qualify for unsecured cards or larger loans.
Here are 4 times when you should use your debit card instead of a credit card
While there are benefits to using a credit card — including the ability to earn rewards and cashback, as well as increased protection from fraud — there are some instances when it’s better to remove your debit card.
1. You need quick access to cash
If you need cash, you can use both a debit card and a credit card to withdraw money from ATMs. If you use a credit card to withdraw cash, it’s considered a cash advance, and interest is immediately charged on the transaction (often more than if you just keep a monthly balance). Most financial experts warn against cash advances because they can be very expensive.
When you use your debit card to withdraw money from an ATM in the network, the transaction is free. If you run into trouble and use an off-network ATM, you will likely incur transaction fees from both your bank and the ATM provider. This can be expensive, but not nearly as much as using a credit card to withdraw money.
Some banks offer to reimburse a certain number of off-network ATM fees monthly, quarterly or annually, e.g. Ally and Alliant.
Many retailers offer the option of adding a cash withdrawal to your purchase at the point of sale when using a debit card.
If you’re in a situation where you need cash and can’t find a network ATM nearby, Ted Rossman, Senior Industry Analyst at Bankrate, recommends going to a retailer and withdrawing money with a purchase to avoid ATM fees.
While this strategy can save you money on transaction fees, you need to have the money in your checking account to cover both your purchases and the extra money added to your sales. If you overspend, your bank can charge the overdrafts. (Check out Select’s list of the best checking accounts for travelers.)
2. You can avoid merchant fees
Some small businesses, online retailers, and restaurants charge a fee when you use your credit card to make a purchase, but exclude debit cards from these fees.
“As much as I love credit card rewards, I wouldn’t want to pay a 3% fee just to get just 1% or 2% cashback,” says Rossman. “If there is no management fee, it would be a better choice.”
You may also consider using a debit card instead of a credit card when making an international purchase if you have a credit card that charges foreign transaction fees. Before you travel abroad, check whether you have the cheapest fare.
3. They manage to spend better
If you’re having trouble paying off your credit card, using a debit card might be a better way to overspend.
“If you have credit card debt, it makes sense to put routine purchases on a debit card to avoid getting into more debt. But that’s a minor catch because you might not have the money,” says Rossman.
If you make a minimum payment on credit card bills each month, interest rates will continue to rise on both revolving balances and new purchases. “That’s part of what gets people with credit cards in trouble,” says Rossman. “Those minimal credit card payments can take a long time and cost you a lot of money in interest.”
In general, he says he uses credit cards as much as possible because they offer better rewards programs and buyer protections (anti-fraud, extended warranties, buyer protection, etc.) than debit cards. “Of course, this strategy only works if you pay your credit card bills in full, otherwise the high-interest rates outweigh the benefits,” adds Rossman.
4. You have a debit card with rewards
If you have limited credit card options due to bad credit history, consider a rewards debit card. Rossman acknowledges that debit card rewards lag significantly behind credit card rewards. “Most debit cards don’t offer any rewards at all,” he says.
Notable features include the Discover Cashback Debit Account, which offers cardholders 1% cash back on up to $3,000 on monthly debit card purchases, and The Cash Card (cash app debit card), which offers up to 15% cash back at select times. shopkeeper.
While some larger banks like Bank of America don’t offer cash back rewards on their debit cards, they do have a program called BankAmerideals that gives checking account holders access to benefits like cash back, coupons, promo codes, rebates, and access to unique experiences. You can see all available offers by logging into your account online. Normally you have to register to activate the bonuses.
If you’re tempted to overspend and you’re getting interested in high revolving balances and high-yield credit cards, a debit card can help you manage your finances because you can’t spend more than you have on the linked account.
“It’s important to think about what you’re using the card for and your overall financial health,” says Amy Zirkle, payments and deposits program manager, Office of Consumer Credit, Payments and Deposits Markets at the Consumer Financial Protection Bureau (CFPB). . “There are pros and cons to using both debit and credit cards.”
The golden rule of credit card use is to pay off your balance in full every month. “My best advice is to use a credit card like a debit card—pay the full amount to avoid interest, but take advantage of credit cards’ superior rewards programs and buyer protection,” says Rossman. “There are many credit cards with no annual fee that offers at least 2% cash back on every purchase.”
Are debit cards the same as credit cards?
While credit and debit cards may look similar and have similar features, such as 16-digit card numbers, expiration dates, and branding logos from Visa or MasterCard, credit and debit cards differ in important ways. The main difference is that debit cards are linked to a bank account and withdraw money directly from it (similar to a check). A credit card, on the other hand, does not withdraw money immediately and must be repaid later, subject to any interest that may accrue.
Can you earn rewards with a debit card?
Typical, no. While debit cards don’t earn points or miles with every purchase, the accounts they withdraw money from can offer users benefits in exchange for a certain number of transactions. Standard debit cards also often offer a rounding feature that allows users to transfer small amounts of money to a savings account, a feature that credit cards don’t have.
Do all credit cards charge interest?
While you may see 0% interest promotions, all credit cards eventually charge interest on loans that roll over from month to month. This interest is based on an annual percentage rate (APR). To avoid paying long-term interest, pay off your balance in full each month.
Can anyone get a credit card?
Most people can apply for and get a credit card, but if they have had poor or no credit history, the credit cards they qualify for may not be as useful. People with bad or bad credit can apply for a secured credit card, where the credit limit is secured by a deposit when the card is opened. Higher credit ratings are required for more attractive rewards cards.
Is a credit card more secure than a debit card?
Credit cards generally offer better consumer protection against fraudulent purchases than debit cards. This fraud protection may not extend as generously or easily to debit card purchases.
Conclusion – Is it better to use a credit card or debit card?
Credit and debit cards may look similar, but their pros and cons are very different. If building credit and redeeming rewards are important to you, credit cards are essential tools on your financial journey. If you prefer to be in control of your finances, a debit card is a better choice. Whichever you choose, make sure you understand the fees associated with each account.
