Credit Cards vs. Debit Cards: Which is Better for You?

Learn when to use credit cards vs. debit cards and the differences between the two types.

A selection of credit cards
(Image credit: Getty Images)

Credit cards vs. debit cards — what's the difference? Which type of plastic is best for you?  Personal finance experts perennially disagree on which type of plastic delivers more benefit but the decision should be based on a cardholder’s approach to risk and ability to manage debt, as well as the type of purchase being made. Knowing how each card works can help you use the best card for your situation. 

Credit cards vs. debit cards: What's the difference?

The main difference between debit cards and credit cards lies in how the merchant is paid. 

Debit cards
Debit cards draw money from your checking account, while credit cards rely on money that the credit card company has loaned you.

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Debit cards are linked to checking accounts. When you make a purchase money you already have is deducted, usually within 24 hours. How much you’re able to spend using a debit card depends on how much cash you have in your account. If you spend over that amount, your card could be declined or you could be charged an overdraft fee

Credit cards
On the other hand, credit cards allow you to make purchases by drawing on a line of credit. How much you’re able to spend with a credit card depends on what your credit limit is. You won’t be able to exceed this amount. Any purchases you make using a credit card are added to your bill, with a minimum payment (usually a percentage of that total bill) due each billing cycle. However, if you spend too much and fail to pay off your credit card each month, you could land in debt and accrue interest. 

Another significant difference between credit and debit cards is the chance to earn rewards. For many, the appeal of a credit card is linked to the fact that by shopping with them you can earn cash back, points and/or airline miles. Plus, credit card perks often include extended warranties and purchase protections, depending on the type of credit card.

Keep in mind that some merchants will require you to use a credit card. For example, if you're picking up a rental car you'll likely need a credit card, and Airbnb only lets you pay with debit cards that can be processed as credit cards.

Additionally, credit cards affect your credit score, while debit cards do not. 

Which card offers most protection? 

Debit card protections

In the case of fraudulent activity on your debit card, you’ll be protected by the Electronic Funds Transfer Act (opens in new tab)(EFTA). 

According to this law, if your debit card gets lost or stolen, you’ll only have two business days to report it to the bank for your fraud liability to be $50. If you report after two days — but before 60 days — your liability will be $500. Notifying the bank after 60 days means you could be liable for all transactions. 

Credit card protections

Credit cards offer a bit more protection, thanks to the Fair Credit Billing Act (opens in new tab). If you notice any fraudulent transactions on your credit card, you’ll only be liable for up to $50. Plus, many credit cards offer additional purchase and rental protections as well as extended warranties on transactions made with the card.

While both debit cards and credit cards offer fraud protection on your account, credit cards typically offer greater security. Both credit and debit accounts are monitored for any suspicious transactions, and your card issuer will alert you if any transactions seem off. 

However, opting for your credit card is typically the safer choice. If there’s fraudulent spending on your credit card, your money will still be safe in your checking or savings account. However, if a fraudster spends money on your debit card, you’ll be out of cash until you can get the charges reviewed.

When to use a credit card

Here’s when you’d be better off using a credit card to make purchases. 

When you’re online shopping: Take advantage of fraud liability protections offered with credit cards when making online purchases. If there is any fraudulent activity on your credit card account, it’s not “your” money to get back, but rather the card issuer’s. Your own funds will still be secure in your checking or savings accounts. 

If you’re looking to build credit: If you’re looking to raise your credit score or build your credit history, using a credit card is often a good option. By showing a history of consistent, on-time payments, you’ll be able to do just that. Plus, there are many cards geared toward people with bad credit or no credit history that effectively function as a debit card, considering you’ll have to put down a cash advance that acts as your credit limit. Here are the best credit cards for bad credit

When you want to earn rewards: Using a rewards credit card can be an easy way to earn cash back or rewards points on the purchases you're already making. Some cards have a flat-rate cash back rewards rate, while others offer higher points on purchases made in specific spending categories. Plus, many credit cards come with other additional benefits, like purchase protections, extended warranties and free checked baggage. 

When to use a debit card

When you’re at the ATM: If you need to withdraw cash, you should use your debit card. If you use an ATM that’s in-network, withdrawing cash is free. On the other hand, if you use a credit card to take out cash at the ATM, you’ll be charged interest on the transaction as it’s considered a cash advance. And while using an out-of-network ATM with your debit card will usually charge a fee, it’s likely still cheaper than using a credit card. You can also avoid the ATM altogether by shopping with a debit card somewhere that can give cash back. 

If you need to avoid debt and interest:  If you’re looking to avoid overspending and in turn taking on debt, you should stick to using your debit card. This way, you won’t be tempted to run up a balance that you can’t pay off in full each month. If you don’t carry a balance, you also won’t incur any interest charges which can be expensive.

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Erin Bendig
Personal Finance Writer

Erin pairs personal experience with research and is passionate about sharing personal finance advice with others. Previously, she was a freelancer focusing on the credit card side of finance, but has branched out since then to cover other aspects of personal finance. Erin is well-versed in traditional media with reporting, interviewing and research, as well as using graphic design and video and audio storytelling to share with her readers.