How to Get the Most from Your Debit and Credit Cards

You probably have a debit card and a credit card in your wallet right now. But when it’s time to pay, do you know which one you should reach for? 

The best choice will come down to your financial situation and your personal goals. 

While debit cards and credit cards will both allow you to make a purchase, the money behind each transaction comes from a different place. With a debit card, the money comes from funds you already have in your checking account. With a credit card, you borrow money from the card issuer and repay it later.

That distinction can impact everything from your budget to your credit score. Understanding how each works is the best way to determine whether a debit card or credit card is best for your situation.

“The right card really depends on what you’re trying to accomplish with your purchase,” says Juan Rosales, Community Banker at Amplify Credit Union. “Understanding how your debit and credit cards work can help you choose the payment method that works best for you.”

Here, we’ll go over everything you need to know to decide between a debit card vs. a credit card and how to get the most from both.

Debit Card vs. Credit Card: What’s the Difference?

The biggest difference between using a debit card and a credit card is where the money comes from. 

When you use a debit card, the funds are usually withdrawn directly from your linked checking account. To pay for a purchase, you generally need to have enough cash available in the account to cover the cost. If you don’t, the transaction may be declined or handled according to your financial institution’s overdraft policies.

On the other hand, when you use a credit card, you’re borrowing against a line of credit. No money comes directly out of your checking account. Instead, the purchase is added to your credit card balance. You’ll receive a bill when the cycle closes and must make at least the minimum payment by the due date.

If your credit card offers a grace period, you can generally avoid paying interest on purchases by paying your full statement balance by the due date. If you do carry a balance from one billing cycle to the next, however, interest charges can make those purchases more expensive over time.

When should you use a debit card?

A debit card can be a good option if you want to keep a close eye on your cash flow and ensure you don’t spend more than you actually have. The best uses for a debit card are:

Everyday Purchases and Budgeting 

Paying for day-to-day expenses like groceries, coffee, lunch or gas are good candidates for debit card purchases. This is especially true if seeing the money leave your checking account is more likely to help you stick to a budget. 

If you’re trying to lower your monthly spending or pay down debt, budgeting with your debit card can be especially helpful. You know exactly how much money you have when you go to make a purchase, and you won’t have another bill you need to deal with later.

To Avoid Interest Charges

Unlike a credit card, when you use your debit card, the money you’re spending is your own. You’re not borrowing money from a credit card issuer. That means there are no interest charges on debit purchases, and you don’t have to worry about making on-time payments. 

If you’re someone who has carried a credit card balance from month to month, switching to a debit card can also help you curb your discretionary spending. Using a debit card can create a natural limit and help prevent you from overspending, as your purchases are tied more directly to the money available in your account.

To Withdraw Cash

Debit cards should be your go-to option when you need cash. You can use your debit card to withdraw money directly from your checking account at an ATM. Depending on your financial institution and the ATM you use, fees may apply, so check your account’s ATM policies before withdrawing cash. 

While it’s possible to use credit cards for a cash advance, it can be expensive. Fees may apply, and interest on a cash advance could begin accruing as soon as you receive the funds. So, for ordinary cash withdrawals, a debit card is almost always the better option.

When should you use a credit card?

Credit cards do offer certain benefits that debit cards don’t, but you have to be able to use your credit card responsibly in order to enjoy those benefits. In other words, don’t spend more than you’re able to repay every month. If you can control your spending, a credit card can be used to:

Build Your Credit

When you use a debit card, that activity isn’t usually reported to credit bureaus. As such, a debit card will not help you build your credit history. But credit cards can.

Your payment history is an important part of your credit score. If you’re able to pay your credit card on time consistently, it can help you establish a history of responsible credit use and improve your credit score.

One important caveat: that doesn’t mean you need to carry a balance to build credit. Instead, you can use a credit card for purchases you were going to make anyway and then pay the statement balance in full each month. This can help you avoid interest on purchases while establishing responsible credit habits that may help strengthen your credit score over time. 

Provide Additional Protections

While both debit and credit cards offer fraud protections, those protections don’t work in the same way. With a credit card, an unauthorized purchase may reduce your available credit while the charge is investigated. With a debit card, an unauthorized transaction can immediately remove cash from your checking account.

That difference can matter enormously if you need the money in your checking account to pay your mortgage, rent, utilities, groceries, or other monthly expenses. With debit card fraud, those funds may not be available while your financial institution investigates the transaction. That’s one reason some consumers prefer to use a credit card for large purchases or transactions with unfamiliar merchants.

Receive Rewards 

Many credit cards offer rewards such as cash back, points, or miles. If you use your credit card to make purchases you would need to make anyway, those rewards can be a nice bonus as long as you pay your statement balance in full by the due date.

However, rewards should never be an excuse to spend more. After all, a few percentage points in cash back will not offset months of interest charges on a balance. The same goes for annual fees. If your credit card charges one, make sure the rewards and benefits you actually use are worth more than the fee.

Make Both Cards Work for You

The debit card vs. credit card debate doesn’t have a clear winner. Both have their own pros and cons, and which you choose will depend on your financial goals and your spending habits.

“Think of your debit card and credit card as tools for different jobs,” Rosales says. “A credit limit isn’t the same thing as money in the bank. If you use credit, make sure the purchase fits your budget and that you have a plan to pay it off. The goal is to use each card intentionally.”

Debit cards allow you to more easily spend within your means, monitor your available cash, and avoid taking on debt for everyday purchases. Credit cards can help build your credit history, offer additional protections and perks, and provide more flexibility for certain transactions. 

Before using either card, it’s best to understand how each works, what fees may apply, and what protections your financial institution provides. In the end, knowing when and how to use each can provide you with two useful tools for managing your money. Understanding the difference between a credit card and a debit card can help you use the right one in the right situation. Regardless of which is your go-to, use them wisely by keeping track of your spending, not letting balances get out of control, and understanding what your limits are.

This article was first published on July 23, 2021.