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 that really the best choice? Is there a reason you should switch to the other side?
There are a lot of 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
So what’s the difference between the two?
How Debit Cards Work
Your debit card is basically like a plastic check: When you 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, your transaction will be declined.
Because the money is taken from 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 spend more money than is in your account.
Debit cards also work as ATM cards, allowing you to take cash directly out of your bank account.
How Credit Cards Work
Your credit card, on the other hand, 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” and can no longer be used for purchases. Your credit limit is based on your credit history and income; the stronger those are, the more the bank trusts you and the higher your credit limit will be.
Each month, you’ll get a bill for the amount you spent. Though you’re only required to cover the minimum payment (and not the whole balance), you’ll 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.
6 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):
- Help you build positive credit history
- 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
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, its use is usually reported to the major credit bureaus — TransUnion, Equifax, and Experian — and therefore shows up on your credit reports.
Using your credit cards responsibly will help you build a solid credit history and improve your credit scores. That’s in stark opposition to debit cards, which don’t affect your credit history at all.
Why does that matter? Life is 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.
A solid credit history and good credit scores can also help you get better terms on car loans and mortgages, and 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 build credit with credit cards.
2. Manage Fraud Better
Should you be more concerned about losing your debit card or losing your credit card? The former, 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’ll 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.
And, whether you’re victim to credit card fraud or debit card identity theft, federal law dictates your level of liability.
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 changes. 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 before it’s used.
This limited liability is one of the main reasons experts recommend using credit cards — especially for online purchases.
Debit card fraud protection, on the other hand, is covered by the Electronic Funds Transfer Act (EFTA) — and 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 day after the loss: $500
- More than 60 days from when your statement is sent: the entire amount
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 rewards you can earn:
- Cash back: Get a percentage (usually 1-5%) of each purchase back as a statement credit — which is 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, or statement credits.
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.
If you don’t have a strong credit history, you might not be able to get a rewards card right away — but as you build your credit, you’ll probably qualify for more and more.
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 pay for a purchase until your billing cycle ends and your statement balance is due. And with most credit cards, you’ll avoid interest completely if you pay your bill in full.
In other words, you could get an interest-free loan for the period between making a purchase and paying your bill (usually 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 on $1,000, plus extra money for incidentals.
If you’re using a debit card, that money will be frozen until you check out — and that’s even if the company 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 — and not the money in your bank account — which means it won’t put a damper on your vacation budget.
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 (because we all know things are on a timer to break as soon as their manufacturer’s warranty is up).
To learn more about the potential perks awaiting you, read our comprehensive guide to credit card benefits.
When to Use a Credit Card vs. Debit Card
What About Picking “Credit” When You Swipe Your Debit Card?
When using your debit card, you often have the option to pick a “credit” transaction, which requires a signature rather than a PIN.
But it’s important to note: Choosing credit won’t make your debit card act like a credit card.
It 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).
It also could change the processing time: 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.
The One Advantage of Debit Cards
The sole 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, damaging your credit history, and spiraling into uncontrollable credit card debt are certainly not worth the perks.
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.
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 above, properly managed credit cards have myriad financial benefits, including rewards, credit building, and 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 what goes into credit scores, as well as how to take advantage of credit cards while avoiding fees.