Credit vs debit: which should you choose when making purchases?

Credit cards offer a credit line that you can borrow against, up to a specified limit. This is very convenient for those who want to buy something now and pay for it later. 

Debit cards, on the other hand, typically sync up with your checking account and withdraw funds in real-time at the point of transaction. And unlike credit cards, you’re not borrowing funds, so you don’t ever have to worry about paying interest. Both credit cards and debit cards have benefits and drawbacks to consider. 

When it’s beneficial to use your credit cards 

Credit cards are beneficial to use when you want to effectively build credit, have added protections, and get perks when making a purchase.   

“There are two big benefits for credit cards—rewards, points/cash back. This is a great way to get discounts,” says John Pfisterer, chief financial officer at Supernet, a full-service card network. “This is exclusive to credit cards and funded by higher transaction costs that merchants pay for the use of the acceptance of the credit cards.”

Aside from rewards, credit card benefits may include:

• Getting fraud and payment protection. Credit cards may offer more robust protections for consumers in instances of fraud or if there are payment errors. “Another benefit is the right around charge backs—the ability to dispute a charge—and have it automatically reversed while it’s being investigated by the credit card companies,” explains Pfisterer  “Most debit cards may do something like this, but it’s not baked into their rules.”
• Building credit. Your credit score is based on borrowing money, so credit cards can be leveraged to build credit when payments are made on time. Credit cards are a type of revolving credit which may add to your credit mix, one of the factors that affect your credit.  
• Having travel insurance or rental car coverage. Some reward cards don’t just offer cash back or points that can be used for travel or money in your account. There are added protections you might get such as travel insurance or rental car coverage. 

Generally, the most benefits are offered through rewards cards that may or may not come with an annual fee. But even a basic credit card with no fee can offer more security against fraudulent activity and be beneficial for your credit history if you use a small portion of your limit and pay off balances in a timely manner. 

Let’s take a closer look at the core benefits of using a credit card. 

1. To earn rewards while you shop 

Credit cards aren’t just a form of payment, but help consumers earn and save when they make purchases. This can happen in a variety of ways that put money back into the hands of consumers or benefits from rewards which can offer various redemption options. Some of the top rewards when you shop include:  

• Introductory bonuses. Many credit cards offer attractive sign-up bonuses for new customers. You typically need to meet a specific spending threshold during a set period of time to get the bonus. These bonuses may be cash back or miles that are designed to entice you to sign up for the card. But if you don’t meet the spending requirements within the set timeframe, you won’t be eligible for the bonus. These intro offers are commonly used by many “travel hackers” who utilize credit card rewards to score free or low-cost trips. 
• Cash back. Inflation is hurting everyone’s wallet right now, so being able to earn money back while making everyday purchases can be incredibly helpful. Instead of putting more time at your job or a side hustle, you may be able to earn some cash back using a rewards credit card without additional effort. Plus, some credit cards offer a higher percentage on certain categories like groceries or gas, which can help soften the blow of higher prices. 
• Credit card points. Some credit cards allow users to accumulate points that have many redemption options, such as gift cards, hotels, flights, or cash back. 
• Miles for traveling and vacationing. Another one of the top credit card perks is miles to be used for travel. Many of these cards are tied to specific airlines, where you’ll earn miles and other rewards each time you fly with that particular company. Miles can be redeemed to cover the total or partial cost of a trip, making a vacation to your dream destination more in reach. Additionally, you may be able to use miles to book experiences, hotels, or even make a donation. In other words, there may be some flexibility with how you use your miles as well. 

2. To protect your money 

Credit cards can offer an additional layer of protection if they end up in the wrong hands since they’re not tied to your bank account. Visa and Mastercard both offer zero-liability coverage, which means that cardholders won’t be held responsible if there are fraudulent charges on your account. 

Plus, if your credit card is used by someone else because it’s lost and stolen, the maximum financial loss is up to $50, according to the Federal Trade Commission (FTC). On the other hand, debit cards may have steeper financial consequences depending on when you file a report. 

According to the FTC, if the loss is reported within two days of the initial loss or theft then the total loss is up to $50. After the two-day time period up to a total of 60 days, the loss can increase to $500. What’s worse is that after 60 days, your loss may be up to the amount withdrawn. 

ShirleyAnn M. Robertson, financial professional at Prudential suggests consumers take precautions ahead of time. “I think part of you being proactive in protecting your finances, is having these calls with that credit card company before something happens. So plan for the worst hope for the best, but calling to say, hey, if there is a situation of fraud, what is your procedure, that way you are clear on what they’ll do and how they’ll help you.”

3. To build credit 

You don’t necessarily want to take out a loan simply to build credit. So one way to build or boost your credit score is through use of a credit card. More specifically, by using it in a smart way which means showing that you can build a solid repayment history and maintain low balances. In other words, keep up with on-time payments and set a target to keep credit utilization—the percent of credit you use—less than 30%. 

“What the credit bureaus are scoring with your score is your reliability in borrowing money and paying it back on time. A debit card—because you’re not borrowing—does not help you along those lines,” says Pfisterer.

If you’re concerned about overspending, charge your gym membership or a small recurring payment on your credit card. This strategy helps avoid temptation to overspend while still gaining the positive credit-building benefits. Credit card payments get reported about every month to the credit bureaus Experian, TransUnion, and Equifax. 

4. To cover large purchases 

If you have a large purchase and can pay it off by the due date, you can give yourself a buffer with a credit card. 

“In the credit card world, we kind of have two groups of consumers—transactors, who pay their credit card off in full every week. And then you have revolvers who carry a balance,” explains Pfisterer. “If you are a transactor you should probably use your credit card for every transaction you can. The reason? Your bank is giving you an interest free loan. You will not have to pay for it until 30–35 days later. Interest free. For a group of the population, a credit card is a fantastic way to get interest free money while holding on to your own cash until it is time to pay that bill.”

In other words, you buy yourself more time and may improve your overall cash flow. If you can’t pay off the large balance by the due date, you’ll be hit with interest that can add up quickly. Credit cards can keep you in the debt cycle and be tough to get out of. “The flip side is if you’re paying your balance off slowly. That interest for the purchase you made on the 1st of the month is at a fairly high rate,” says Pfisterer. 

If it’s a large purchase and you’re paying the minimum, the interest could be significant. However, some consumers may qualify for a credit card with a 0% introductory purchase APR. In that case, interest may not accrue during that introductory period, which may be for six months or more. 

5. To track how you spend 

You may not consider a credit card as part of your budgeting strategy, but if you use a single card for your purchases you can get a snapshot of your spending and gain invaluable insights. Part of budgeting is tracking spending, and a credit card may be able to do that at a higher level than a debit card. 

For example, credit card companies may categorize your spending so you can see how much you’re paying for groceries or on healthcare or entertainment. Using a credit card when making payments is good for tracking expenses and can help you be more mindful of your spending if you check in regularly and see all your transactions in one place. 

“Using one card allows me to be a bit more cognizant and aware of my frequency of use, and also how much I’m charging” says Robertson. “Using one card allows me to be far more present. If I’m using multiple cards, I’m not seeing the total hit to me anywhere. So having one card allows me to really be focused on all my online purchases. And also if there is an error, I can catch it much quicker, because it’s one card versus having multiple cards to follow and track.”

When to use a debit card instead 

Credit cards come chock full of benefits and protections that may help consumers in a variety of ways. Many hotels or rental car providers may require a credit card to check in or may decide to hold funds using your debit card. Even so, there may be times when using a debit card is preferable. 

• You’re paying off credit card debt. If you’re in too deep with credit card debt, you may want to hold off on using credit cards for a while. Using a debit card can help you spend only what you have and may be a better budgeting option until you address the underlying cause (such as overspending or not enough income). 
• You want to avoid the temptation to spend more. Some studies show that consumers may be tempted to spend more with a credit card or unknowingly be driven by rewards. A debit card may be a preferable option if you’re concerned about overspending and charging close to the limit. 
• You keep opening new credit accounts to meet your needs. Credit cards can be useful when managed properly. But if you need to open several credit cards to manage your spending or needs, you could end up deep in debt and harm your credit. 
• You forget to make payments by the due date. A critical component of responsible credit card use is making payments by the due date. If you’re unable to do that consistently, you can ding your credit and may be hit with late fees and interest. You can sign up for automatic payments to avoid this issue but if that leads to overdrafting your account, you’ll have another issue on your hands. A debit card doesn’t require you to make payments so may be preferable in this case. 
• You feel more comfortable with a debit card. Some people aren’t comfortable using a credit card and simply feel better using a debit card. “I find that the emotional side is just as strong, if not more than the actual financial sense in doing something,” says Robertson. “Sometimes if it means from an emotional standpoint…I just don’t trust myself with credit cards, I’d rather use my debit. If it’s gone from my bank account, I don’t have the money, I won’t keep charging…And you know, from that perspective, I’m 100% okay because that makes that individual from an emotional standpoint feel good.” 

Knowing what protections you get out of a credit card or debit card as well as knowing the risks involved with each can help you make an informed decision when it comes to your spending.