Debit vs. Credit: Which Should You Use?

When it comes to making purchases, consumers pay with plastic roughly 60% of the time, according to the Federal Reserve. But while debit and credit cards offer a convenient way to pay, each payment method has unique features you need to know about. Debit and credit cards both offer ease of use and protection against unauthorized transactions. However, credit cards incur debt while debit cards draw from your checking account.

Before making your next purchase, compare the pros and cons of using a debit vs credit card to determine which is best for your situation.

When to use credit vs. debit

What is a credit card?

A credit card is a form of payment that lets consumers and businesses purchase goods and services and repay the balance later. Credit cards typically have a spending limit or credit line. As a cardholder pays a balance down, the available credit for spending increases. There are many different types of credit cards, including cards that offer rewards, 0% introductory APRs and other benefits like travel insurance and purchase protections.

Credit cards are generally associated with one of four major payment networks: Visa, Mastercard, American Express or Discover. A card can be used at any retailer that accepts its payment network. Visa and Mastercard are the most widely accepted, but American Express and Discover are accepted at 99% of places that accept credit cards in the U.S. However, when traveling internationally, American Express and Discover are not as widely accepted for payment.

How do credit cards work?

• Based on credit history and other factors, a card issuer provides a card with a credit line (or spending power) that limits how much you can spend on the card before you need to pay your balance.
• You can make purchases on your credit card throughout the month or billing cycle. At the end of a billing cycle, you’ll receive a statement with the total balance owed, the minimum payment required and a due date.
• Most credit cards offer a grace period of up to 25 days. If the statement balance is paid in full by the end of the grace period, then no interest charges apply.
• If a balance carries over from one statement to the next, the card issuer charges interest based on the average daily balance during the statement period.
• As the balance is paid down, that frees up available credit for additional purchases.
• If the credit card earns rewards, the rewards are typically posted after the statement closes.

Pros and cons of credit cards

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Benefits of credit cards

Build credit through responsible use

Your payment history and credit utilization ratio make up roughly two-thirds of your credit score. By making all your credit card payments on time and keeping your balances low, you can build a solid credit score. Ideally, you should pay the card’s entire balance each month to avoid interest. However, when that’s not possible, paying down the balance as much as possible reduces your interest charges and utilization ratio.

Rewards in the form of cash back, points or miles

Many cards offer rewards on your purchases in the form of cash back, points or miles. Rewards can help you finance travel, or help you pay off debt or save for the future.

Some cards offer the same rewards on every purchase. Others offer bonuses on certain categories of spending, such as travel, dining, groceries or gas. To maximize your rewards, select a card whose bonus categories match the areas where you spend the most.

Consumer protections

Under federal law, cardholders are limited to $50 in losses for unauthorized transactions if their card is lost or stolen when the card issuer is notified promptly. However, most credit card issuers take these protections further by offering $0 liability for unauthorized transactions.

These protections give credit cards a major advantage over debit cards. Transactions are removed from your balance owed as long as you report them right away.

Credit cards may also include other protections, like purchase protection, return protection and extended warranties.

Travel benefits and perks

Travel credit cards include a range of benefits to save money and improve your travel experience, depending on the type of card.

• Airline credit cards often feature the first checked bag free, priority boarding and in-flight discounts.
• With a hotel credit card, you may receive automatic elite status and an annual free night certificate.
• General travel cards may include airport lounge access, travel protections or annual credits.

Sign-up bonuses

When you apply for a new credit card, you may be eligible for a sign-up bonus. A sign-up bonus usually offers a large sum of cash back or points for meeting a spending requirement.

For instance, you may get 50,000 points when you spend $3,000 within three months. Offers vary widely by card, and premium credit cards tend to offer the highest bonuses with the largest spending requirements.

Promotional interest rates

Some credit cards offer promotional interest rates on balance transfers, purchases or both. You can get interest-free or low-interest financing for a limited time, so more of your monthly payment goes toward reducing your balance. Promotional interest rates typically last between six and 21 months, and when the promotion expires, the standard APR applies to the balance remaining from that point forward.

  See our picks for best credit cards.

Cons of credit cards

Potential to overspend, leading to credit card debt and damaged credit

With credit cards, it’s far too easy to overspend and max out your credit limit. Many consumers fall into the trap of overspending to earn rewards or because the minimum monthly payment is a fraction of their total balance. As your credit card balance creeps higher, your credit score can be negatively affected. To make matters worse, the growing balance leads to higher interest charges that can harm your finances.

Best credit cards require excellent credit

The best credit cards usually require excellent credit to qualify. While this can inspire some consumers to boost their scores, others are left with subpar credit cards that may even charge expensive fees.

Typically require a hard credit pull for approval

In most cases, the card issuer will perform a hard inquiry on your credit report when you apply. The impact is generally less than five points, but those lost points could make or break other loan applications. On the bright side, the impact is short-lived, and your credit score may return to normal within a few months. While the credit inquiry stays on your credit report for up to two years, it only affects your credit score for up to 12 months.

Pay interest on any outstanding balance

When you carry a balance from one statement to the next, the card issuer will charge interest based on your average daily balance. With the average credit card interest rate of 21.47%, the interest charges can overwhelm your budget in a hurry.

Potentially liable for fees

Credit cards charge an assortment of fees if you miss a payment on your credit card. You may be hit with late fees, over-the-limit fees, a penalty APR and other potentially hazardous penalties.

In addition, some credit cards charge annual fees. However, depending on the card’s benefits and rewards, it may be worthwhile to pay an annual fee.

What is a debit card?

A debit card is a combination of an ATM card and a payment card. It allows customers to access their accounts through an ATM for withdrawals, deposits, transfers and balance inquiries. Debit cards can also be used to pay for purchases by signing a receipt like a credit card or by using a PIN. With each purchase, the money is immediately withdrawn from the linked account. The debit card’s purchasing power can’t exceed the balance of the linked bank account.

How does a debit card work?

• You must have a checking, money market or savings account to open a debit card.
• You can use a debit card to make deposits, transfer money or withdraw cash at an ATM.
• You can also make purchases with a debit card just like a credit card, wherever credit cards are accepted.
• With each transaction, money is immediately withdrawn from your bank account.
• Your spending power is limited by the amount of money that’s available in your bank account.
• Pending authorizations can impact your available balance until the transaction is settled and the hold is released — for instance, gas stations, rental cars and hotels may place a hold on your account.

Pros and cons of debit cards

Benefits of debit cards

Linked to checking account, so can’t accumulate debt by spending money you don’t have

Debit cards are popular among people who want to avoid debt. Your spending power is limited to the amount of money in your bank account. This feature can help consumers be more mindful about their spending so they don’t run out of money before their next paycheck.

Easy to get by opening a bank account and depositing funds

Getting a debit card generally doesn’t involve a credit inquiry. Debit cards are typically included at no extra charge when you open a bank account. You can deposit money into your bank account to increase your spending power. You can easily access your funds at an ATM or when making purchases in-store, online or over the phone.

Withdraw cash at ATM or checkout

Debit cards also operate like ATM cards by providing access to your cash at ATMs. Some stores also allow customers to get cash when making a purchase. However, stores may limit how much cash back you can receive.

Cons of debit cards

Don’t build credit history

While debit cards can help you avoid debt, they don’t build a credit history. Most banks don’t report your transaction history to the three major credit bureaus.

No rewards, benefits or perks

Debit cards typically don’t earn rewards or provide valuable benefits that many credit cards do. In order to access those features, you’ll need to sign up for a credit card that offers them.

Can’t access additional funds in case of an emergency

When an emergency strikes, many consumers turn to their credit cards to cover the bill. Debit cards can’t provide the same emergency funding since you’re limited to the balance in your bank account. In these situations, consumers may have to rely on riskier financing options that often carry higher interest rates. Payday loans, for example, can have onerous fees and interest rates that make them harder to pay off.