Credit cards vs. debit cards: Which should you use?

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Have you ever found yourself frozen at the checkout, frantically deciding between your credit and debit card while impatient shoppers line up behind you? You're not alone. Even in online shopping, that ticking checkout timer can make the choice feel just as pressured.

Understanding the differences between debit cards and credit cards can help you make smoother purchase decisions and more effectively work toward your financial goals.

How credit cards work

Think of a credit card as a financial multitool. Each time you swipe, tap, or insert your card, you borrow money from a bank or financial institution to make your purchase. Your credit limit, set by the card issuer based on your financial profile, determines how much purchasing power you have at your fingertips. However, a credit card is not just a magic piece of plastic. 

At the end of each monthly billing cycle, you'll need to make at least a minimum payment. But here's the catch: if you only pay the minimum, the remaining balance rolls over and starts accruing interest. In today's market, that interest often exceeds 20% annual percentage rate (APR). But you can avoid credit card interest altogether by paying your balance in full every month — no harm, no foul.

Benefits of credit cards

1. Buy now, pay later: This can be handy when waiting for your next paycheck to hit your account.
2. Rewards programs: Many cards offer points, miles, or cash back on your purchases.
3. Credit health: Responsible use can improve your credit score over time, making it easier to qualify for future loans.

What to keep in mind when using a credit card

The Federal Reserve reports that U.S. credit card debt reached a staggering $1.14 trillion in Q2 of 2024. Luke McElhenie, a financial planner at Triumph Wealth Management, points to inflation as a primary culprit: "Many people are reluctant to decrease their standard of living. Instead of cutting back on spending when prices rise, they turn to credit cards."

This drives home the main point to remember when using a credit card: are you using it as a financial tool or a life preserver? If you're consistently living outside your means, credit cards can quickly worsen the situation due to their high interest rates.

How debit cards work

Think of your debit card as a direct line to your bank account. Whether you withdraw cash from an ATM or make a purchase, the money comes straight from your checking or savings account.

However, it’s important to monitor your account balance. If you try to spend more than you have, you could face overdraft fees and a frozen card until you have money in your account.

Benefits of debit cards

While debit cards rarely offer flashy rewards, they can save you money in other ways:

1. Fee-free cash withdrawals at in-network ATMs.
2. Some retailers waive processing fees for debit transactions.
3. Added security with PIN requirements for purchases.

Things to keep in mind when using a debit card

Watch out for fees when using out-of-network ATMs. Many banks offer apps or online tools to help you locate fee-free ATM options.

Also, if you lose track of your budget and constantly get charged overdraft fees, ask your bank about overdraft protection. This feature can automatically decline transactions that would cause an overdraft.

When to use a credit card over a debit card

Understanding how and when to use a credit card goes beyond the checkout line — it’s crucial for achieving your long-term financial goals.

To build credit

If you plan to apply for a loan in the future, like a mortgage, credit cards can be a powerful tool for building up your credit. These are some good general guidelines for improving your credit score with a credit card:

• Payment history (35% of your score): Paying your credit card bill in full and on time every month demonstrates to future lenders that you’re reliable, giving them confidence that you’ll manage a larger loan responsibly.
• Credit utilization (30% of your score): Aim to use no more than 30% of your credit limit in any given billing cycle.
• Length of credit history (15% of your score): Since credit cards are so accessible, they are a solid method to start building a positive reputation amongst lenders and creditors.
• Credit mix (10% of your score): Having a diverse mix of credit can be beneficial to your overall score.
• New credit (10% of your score): Opening new lines of credit may initially cause your score to dip, but responsible management can have a long-term positive effect.

Remember, these guidelines aren't just for boosting your score — ignoring them can damage it, too.

To earn rewards

Credit card rewards can be a game-changer if used wisely. From cash back to travel miles, these perks can add up fast. Many cards offer extra points for specific spending categories and welcome bonuses for new cardholders.

Pro tip: Look for promotional transfer offers to maximize your rewards. You might be able to double your points by moving them to a partner airline, for example.

To protect your money

James Baltzersen, president of Riverstone Financial Group, strongly recommends credit cards for their added security: "If someone gets a hold of your debit card, it's far easier to drain the balance out of a bank account than it is to dispute charges through the credit card company." This extra layer of protection is especially valuable for online shopping, where your financial info might be more vulnerable.

To buy time

Sometimes, a credit card can be a short-term solution when cash is tight. Maybe you're waiting on a paycheck but need to make a purchase now. Or perhaps an emergency expense (like a broken furnace in winter) pops up. Remember — given the high interest rates, use this approach sparingly and only when necessary.

When to use a debit card over a credit card

Choosing when to use your credit card often requires some strategic consideration. In comparison, the situations where it's advantageous to use your debit card are much more straightforward.

To withdraw cash

The most common utility of a debit card is to withdraw cash. Use them at your bank's ATMs or in-network locations to avoid fees. While you can use a credit card for cash (called a cash advance), it usually comes with hefty fees or high interest rates.

To budget and avoid debt

You don't immediately see the money leave your account with credit cards, which can make it easy to overspend. With a credit card, all your purchases pile up into one lump sum to be paid at the end of the month, making your spending habits harder to track. 

Debit cards, on the other hand, deduct funds directly from your account with each purchase. This can help you stick to your budget and prevent you from going into debt since you can only spend the money you actually have.

Frequently asked questions

The bottom line

Both credit and debit cards offer convenience, but knowing when to use each can significantly impact your financial health. Credit cards can boost your credit score, earn rewards, and provide purchase protection — but they require discipline to avoid debt. Debit cards offer direct access to your money and can help with budgeting, but they lack some of the perks and protections of credit cards. 

The key is to use each tool strategically. You can make smarter spending decisions by understanding the strengths and weaknesses of both credit and debit cards. 

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.