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Credit Card vs. Debit Card: Why You Should Choose One Over the Other

9 min read
By John Ganotis
Expert reviewed by Michelle Black
Updated Apr 01, 2021
At a glance

Debit cards draw money from your bank account. Credit cards allow you to borrow money that must be repaid. Credit cards offer several advantages, including the chance to build credit and improved security measures.

You get to the register and open up your wallet.

If you’re like many people, you pull out your stalwart piece of plastic: either your bank-affiliated debit card or your rewards credit card.

But is your card of choice really the best choice? Is there a reason you should switch to the other side?

There are many differences between credit cards and debit cards. Here’s when you might want to choose one over the other.

Credit Card vs. Debit Card: The Basics

Credit cards and debit cards look almost identical on the outside. But there are some key differences between these two pieces of plastic.

How Do Debit Cards Work?

Your debit card is basically a plastic check. When you use it to make a purchase, it takes the money directly out of your bank account. So, if you try to spend $500 but only have $250 in your account, the bank will decline your transaction.

Because the money comes out of your account as soon as you swipe, you won’t get a bill and you won’t pay interest. You might, however, face overdraft fees if you try to spend more money than is in your account.

Debit cards also work as ATM cards. You can use them to take cash directly out of your bank account.

How Do Credit Cards Work?

Your credit card, unlike a debit card, is like a loan. When you open a credit card, you’re approved for a certain line of credit.

Also known as a credit limit, a line of credit is how much you can spend before your card is “maxed out.” Once you reach this threshold, you can no longer use your card for purchases — at least not until you make a payment and it posts to your account.

Your card issuer will base your credit limit on your credit risk and income. The amount of debt you owe to others may also be a factor. This is referred to as your debt-to-income ratio, or DTI.

Clean credit history, high credit scores, high income, and a low debt-to-income ratio may all work in your favor. The bottom line is this: The more the bank trusts you, the higher your credit limit will be.

Each month, you’ll get a bill from your card issuer. This bill will include the amount you spent during the current billing cycle (minus any credits), any other charges on the account, and any leftover balance from the previous month. Though you’re only required to cover the minimum payment (and not the whole balance), you’ll typically pay interest on whatever amount remains.

Because credit card interest rates are usually very high, we recommend paying your bill in full each month to avoid interest fees completely.

Many popular credit card issuers, like American Express and Discover, also issue debit cards and prepaid debit cards of various kinds. Networks like Visa and Mastercard serve both credit and debit cards.

What Are Some Important Advantages of Credit Cards?

If you only use your debit card, you’re missing out.

Here’s a brief overview of what credit cards can do. (We’ll take a deeper dive below.)

Credit cards can:

  • Help you build positive credit history (when managed properly)
  • Provide protection if your card is lost or stolen
  • Offer rewards on purchases you’re already making
  • Provide additional benefits, like extended warranties on electronics
  • Give a “free” month-long loan (when you pay your bill in full)
  • Provide more flexibility when booking a hotel or renting a car
Insider tip

Want to learn how to use credit cards to your advantage? Read our guide to building credit with credit cards, and explore the types of credit cards available to the everyday cardholder.

Eager for the details on those benefits — and how you can get them all for free? Keep reading.

1. Build Credit History

Though credit cards sometimes get a bad rap, they’re actually one of the best ways to build healthy credit.

When you get a credit card, the company that issues the account will usually report it to the major credit bureaus — TransUnion, Equifax, and Experian. Therefore, most credit cards will show up on your credit reports.

Using your credit cards responsibly can help you build a solid credit history and may improve your credit scores. That’s in stark opposition to debit cards and savings accounts, which don’t affect your credit history at all.

Why does that matter? Life can be more challenging when you haven’t established enough credit history. You may not be able to rent an apartment or get a cell phone plan. And you may have to put down a deposit when signing up for utilities or internet service.

A solid credit history and good credit scores can also help you get better terms on car loans and mortgages. A clean credit report can sometimes even help you land a job.

If you want to establish credit for the first time —or want to rebuild your credit — credit cards are much more powerful than debit cards. Here’s more on how to use a credit card effectively.

2. Manage Fraud Better

Should you be more concerned about losing your debit card or losing your credit card? It’s the loss of your debit card that presents the bigger risk, and here’s why.

When criminals fraudulently use your credit card, they’re spending your credit card issuer’s money.

When criminals fraudulently use your debit card, they’re spending money from your checking account.

In other words, if someone uses your credit card without your permission, you have time to report and manage the fraud before your bill is due.

With a debit card, however, the money leaves your account immediately — whether the charge is fraudulent or not. And, depending on your bank, it might take weeks or months to get your money back. In the meantime, you could miss important bill payments or have to borrow money for daily expenditures.

Whether you’re victim to credit card fraud or debit card identity theft, federal law protects you. It also dictates your level of financial liability for fraudulent transactions.

The Fair Credit Billing Act (FCBA) caps the liability of credit card users at $50. Most credit card issuers take this a step further and don’t charge cardholders anything for fraudulent charges. But even if your card issuer doesn’t offer that protection, the FCBA says you’re not responsible for any unauthorized charges if you report the card lost or stolen before a criminal uses it without your permission.

This limited liability is one of the main reasons experts recommend using credit cards over debit cards —especially for online purchases.

Debit card fraud protection, on the other hand, is covered by the Electronic Funds Transfer Act (EFTA). And your level of protection varies.

Here’s what you could owe, based on when you report a debit card loss:

  • Before any unauthorized purchases are made: $0
  • Within two business days of learning about the loss: up to $50
  • More than two days after the loss: $500
  • More than 60 days from when your statement is sent: the entire amount of the fraudulent charges

I don’t know about you, but I’ve certainly gone a few days before noticing a card was missing from my wallet. And if you’re ever in the same boat, you’d face exponentially more liability with a debit card than a credit card.

3. Earn Rewards

If you already go to Starbucks for your daily latte, you might as well earn some rewards on the money you’re spending.

Here are the most common credit card rewards you can earn:

  • Cash back: Get a percentage (usually 1%–5%) of each purchase back as a statement credit. It’s like getting a small discount on everything you buy.
  • Points or miles: Earn points or miles on every purchase you make, and then redeem them for flights, hotel stays, statement credits, and more.

Additionally, many credit cards come with a sign-up bonus in the form of cash (like a $200 statement credit) or extra points (like 50,000 bonus points). To attain these bonuses, you usually must spend a certain amount of money after opening the card. For example, a card might give you 50,000 bonus points after spending $3,000 on the card in the first three months from account opening.

If you don’t have a strong credit history, you might not be able to qualify for a rewards card right away. Yet as you build your credit, you may be able to qualify for more and more attractive credit card offers over time.

To learn about the exciting perks you can earn, visit our overviews of rewards credit cards and travel credit cards.

4. Take Advantage of “Free” Short-Term Financing

When you use a debit card, the purchase is deducted from your checking account within a few days.

When you use a credit card, you get a “grace period.” You don’t have to make a payment until your billing cycle ends and your due date arrives. And with most credit cards, you’ll avoid interest completely if you pay your statement balance in full.

In other words, you could get an interest-free loan for the period between the date you make a purchase and your payment due date. This grace period typically lasts for at least a month.

To learn more about credit card billing cycles and avoiding credit card interest, read this: How much should I pay on my credit card bill? And when should I pay it?

5. Travel Without Worry

When you’re on the road, debit cards can be problematic.

Many hotels, gas stations, and rental car companies place “holds” on customer cards that claim an amount of money until the final cost becomes apparent.

Let’s say you’re checking into a hotel for five days. If the hotel charges $200 per night, the hotel will likely place a hold of $1,000 on your account, plus extra money for incidentals.

If you’re using a debit card, that money will be frozen until you check out — and that’s if the hotel even accepts it. (Many require credit cards.)

Not exactly the making of a stress-free vacation, is it? On the other hand, when you use a credit card, a hold reduces your available credit — not the money in your bank account. This approach is much better since it won’t put a damper on your vacation budget (unless your credit card is close to maxed out).

6. Get Additional Benefits

Depending on your credit card issuer, you may also be eligible for further benefits like:

  • Protection on purchases, including extended warranties on electronics
  • Travel perks, including rental car insurance and airport lounge access
  • A smattering of other services, including concierge services to help you buy tickets or make hard-to-get restaurant reservations

Though credit card companies don’t advertise these benefits as much as their rewards programs, they can still be extremely valuable.

Best of all, you usually don’t have to do anything to get these benefits. For example, if you buy that sweet new smart TV on your credit card, you could automatically get an extra year on the warranty without lifting a finger. (And we all know things are seemingly on a timer to break as soon as the manufacturer’s warranty is up.)

Some credit cards even have introductory 0% APR periods for balance transfers and purchases. These are great ways to avoid interest charges. You’ll still need to make monthly minimum payments, even when you have a 0% APR.

With a balance transfer offer, you can transfer a balance from one credit card to another and pay it down over a set amount of time while it accrues no interest.

With 0% APR for purchases, the things you buy won’t accrue interest during a set amount of time. During that time, you can pay them off and avoid spending money on interest.

To learn more about the potential perks that await you, read our comprehensive guide to credit card benefits.

When to Use a Credit Card vs. Debit Card

What If You Pick “Credit” When You Swipe Your Debit Card?

When using your debit card, you often have the option to pick a “credit” transaction, which may require a signature rather than a PIN (or it may require no verification).

But it’s important to note: Choosing credit won’t make your debit card act like a credit card.

This option doesn’t help you establish credit history, and it doesn’t give you additional consumer protections. Instead, selecting “credit” or “debit” just determines how the merchant processes the card (and what fees it pays).

Your selection at checkout could also change the time it takes for your bank to process the transaction. Whereas “credit” transactions might take a few days to clear, “debit” transactions hit your checking account immediately. That’s why, if you don’t have enough money in your account to cover the purchase, selecting “credit” sometimes permits the transaction to go through.

For further details about what happens when you select “credit” vs. “debit” at checkout, see this Reddit thread.

Do Debit Cards Have Any Advantages?

The primary benefit of debit cards is they make it more difficult to spend money you don’t have.

And, depending on your spending habits, that could be more important than anything else. If you won’t be responsible with a credit card, a debit card is undoubtedly a smarter choice. Paying sky-high interest charges, damaging your credit, and spiraling into uncontrollable credit card debt are certainly not worth the perks (learn how to pay off your debt here).

Some credit cards do ask for an annual fee, while debit cards often feature no fees at all. However, in most cases, what you get from the card benefits will likely make the card worth the cost.

Debit cards provide fast access to cash, which can be handy. You can take out a cash advance with a credit card, but this not recommended because they come with high fees and start accruing interest immediately.

But if you’re simply afraid of credit cards because they’ve been demonized by personal finance bloggers and certain financial gurus, we’d encourage you to think again. Remember that debit cards do not help you build credit, and have worse consumer protection laws than credit cards.

The truth is that poor credit card management, such as revolving a balance or making late payments, is what you should avoid. As we’ve elaborated on, properly managed credit cards have a myriad of financial benefits — including rewards, credit building potential, and fraud liability protection.

Bottom line: If you don’t have the discipline to only spend what you can pay off completely each month, stick with debit cards. Otherwise, a credit card is likely the better choice.

How to Get Started With Credit Cards

New to credit cards and wondering where to start?

One of the best resources is our guide to building credit with credit cards. There, you’ll learn about how credit scores work, as well as how to take advantage of credit cards while avoiding fees.

Ready to find a credit card now? Head over to our best credit cards page to read about the most popular cards and their benefits.

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