When to Use Debit vs. Credit

Credit and debit cards provide a quick and easy way to pay for items in-store and online. However, each offers different benefits for the buyer.

Whether you want to buy a cup of coffee or finance a large home remodeling purchase, knowing the strengths of each can help you manage funds and avoid paying additional fees.

We explain how each financial tool works to help you get the most from your money.

Understanding the Basics

Banks issue debit and credit cards, usually as small, thin pieces of plastic that get swiped or tapped at a retailer’s payment terminal. However, it’s possible to use these strictly in their digital form, too. Virtual cards allow consumers to input card numbers along with some additional information to pay for things online or through a mobile app.

What’s a Credit Card?

Beyond these similarities, a credit card connects to a line of credit through an issuing bank. A credit limit is imposed, placing a cap on a consumer's spending, and the balance must be paid back over time. Interest accrues if the cardholder doesn't pay back the full amount immediately. The cardholder ultimately pays back the balance plus interest, if any accrues.

What’s a Debit Card?

Debit cards, conversely, connect to a cardholder's deposit account (most often a checking account). Each time the debit card is used, the account balance updates accordingly, and the account holder can only spend what's available as cash in their account. There's no line of credit — the account holder generally can't borrow money to fund purchases. As a result, there's no interest to pay.

When To Prefer a Debit Card

According to the Federal Reserve, U.S. consumers use debit cards for approximately 56% of card payments, totaling 87.8 billion payments annually.^[1] This popular method of payment offers several advantages over credit in certain scenarios.

Small Daily Purchases

As society moves to a more digital payment environment, pulling out a debit card for small purchases, such as your daily cup of coffee, may be easier. In these situations, debit cards may be ideal since they typically come with lower merchant fees. Some retailers may even refuse to accept credit cards for purchases under $10, making the debit card the only digital payment method available.^[2]

To Avoid Overspending and Debt

Because each debit card transaction immediately comes out of the attached checking account, it's easy to see how much money is left in real-time. Consumers closely watching their budget or hoping to get out of debt may find the debit card helps them achieve their goals. There’s no credit line attached to a debit card, so repeated use won’t put the user into deeper debt.

Scenarios Where Credit Cards Excel

As great as debit cards can be, credit cards do have benefits. Customers often find that credit cards work best in the following situations.

Large Purchases

Using credit cards for big purchases, such as a $1,000 lawn mower, provides shoppers with some additional peace of mind. Unlike many debit cards, most credit card accounts offer some degree of purchase assurance. Customers unsatisfied with a purchase may find it easier to return merchandise and get their money refunded using a credit card. Even if it takes days or weeks to get the refund, that money isn't being held from a personal checking account when it might be needed for other things.

Because retailers can hold deposit funds for purchases like rental cars, using credit in these scenarios keeps the consumer's cash-free until the car has been returned safely.

Online Shopping

Using credit cards for internet purchases offers some perks, such as enhanced purchase protection and zero fraud liability coverage. If the card number ends up in a data breach, the criminals can only take money from a credit account, which will likely be reimbursed after the fraud investigation.

Debit cards, however, don’t usually offer the same level of protection. If the card gets compromised online, it could take minutes for thieves to drain the connected checking account and days to resolve the issue. This means that the customer is unable to access the missing cash while the matter is being resolved.

Travel

Seeing the world can be fun and rewarding, but it comes with some risks, too. A credit card grants additional protection if that card is lost or stolen. Foreign transaction fees can be lowered or waived entirely depending on the credit card, making it cheaper to shop abroad. With travel credit cards' rewards, it's also easy to earn cash back on airfare, hotel stays, and dinners out.

Analyzing Fees, Rewards, and Protections

The best way to know which card is right in each scenario is to fully understand what each card offers. No two debit cards are exactly alike, and each credit card has a range of benefits unique to that card. It’s important to read the terms of each contract to understand the full details.

Understanding Fees: Annual, Transaction, and Overdraft

While debit cards can have lower fees, they aren't completely fee-free. Things to ask about before getting one include:

• Overdraft fees.
• Non-network ATM fees.
• Foreign transaction fees.

Credit cards may have many more fees, including:

• Annual fees.
• Balance transfer fees.
• Interest charges.
• Late payment fees.
• Over-limit fees.
• Returned payment fees.
• Cash advance fees/ATM fees.
• Foreign transaction fees.

Credit cards may waive some of these fees for a limited time, usually to entice consumers to try them out. Read the full terms of service to see what fees apply after the introductory offer.

Comparing Rewards: Cash Back, Points, and Perks

While debit cards haven’t traditionally offered rewards, times are changing. Some pay a small percentage of purchases in categories like fuel or groceries.

However, credit cards generally offer more attractive cash back and points-based offers. They can pay up to 5% back on purchases and offer additional bonuses like a statement credit for streaming services or preferred technology providers.

Because the type and amount of credit card awards change so frequently, it can take some research to find the one best suited for your shopping habits. Be sure to factor in the cost of financing any purchases that can’t be paid off in full each month. The interest you accrue is usually more than the value of any rewards earned from credit cards.

Comparing Rewards: Cash Back, Points, and Perks

While debit cards haven’t traditionally offered rewards, times are changing. Some pay a small percentage of purchases in categories like fuel or groceries.

However, credit cards generally offer more attractive cash back and points-based offers. They can pay up to 5% back on purchases and offer additional bonuses like a statement credit for streaming services or preferred technology providers.

Because the type and amount of credit card awards change so frequently, it can take some research to find the one best suited for your shopping habits. Be sure to factor in the cost of financing any purchases that can’t be paid off in full each month. The interest you accrue is usually more than the value of any rewards earned from credit cards.

Making Informed Decisions on Debit vs Credit Use

Knowing whether to use credit or debit cards depends on the situation. Buying a cup of coffee will require a different approach than financing that next trip to Europe. It also depends on the personality and goals of each consumer. Some shoppers will never want to put items on credit to avoid getting further into debt.

Others find the protections and perks of credit cards so attractive that they will put everything on them and pay them off each month (or week).

Whatever the approach, it’s important to be informed. Carefully read the terms of each card to understand what’s offered and what benefits cost to your bottom line.