For disciplined consumers, plastic can be fantastic. A debit card and credit card allow you to make purchases safer and easier without having to carry cash. That begs the question: When should you use a debit card vs credit card?
The answer to this question is important. That's because, when used properly, each card offers special benefits and advantages. There are drawbacks to using each card, too.
Learn the facts about debit cards and credit cards and when it's best to use one instead of the other. And shop around for these cards carefully so you can reap the most rewards for using them.
Debit Card Facts
Debit cards are issued by banks and credit unions. Like credit cards, they can be used in place of cash when buying items in-store or online. But with a debit card, the funds are immediately taken out of your linked bank account when you make a transaction.
"Debit cards are usually free with a checking account and are linked to a major network, such as Visa, MasterCard, and others," says Carl Casper, executive vice president/COO of Connex Credit Union. "Frequently, they are free to use at merchants and when withdrawing cash at an ATM from the financial institution that issued the card."
Debit cards used in-store require you to swipe the card and enter a PIN number on a keypad. Some can also be used for online transactions as you would a credit card.
Jeff MacMillan is vice president of payments at Affinity Federal Credit Union. He says "consumers who may not qualify for credit can use a debit card to transact. Also, cardholders who are budget-conscious or concerned about their financial well-being and managing credit tend to use a debit card more than a credit card."
Brooklyn Lowery is senior manager/site editor at CardRatings.com. She says there are also prepaid debit cards you can choose from. These have funds already loaded onto them (usually money transferred from one of your bank accounts).
"Some prepaid debit cards don't require checking accounts," says Lowery. "You can almost think of these as gift cards to use anywhere. They are best for people who don't have a checking account or who want to keep tight control over what they spend. Prepaid debit cards also sometimes carry monthly fees and reloading fees."
Credit Card Facts
With a credit card, you draw upon an approved credit limit assigned by the issuing financial institution. You typically have a 30-day grace period within your billing cycle in which to pay your balance in full or in part. When you carry an unpaid balance past your grace period, you normally pay interest, which can add up quickly. You can find yourself in debt trouble when you don't pay your credit card off in full each month.
But when used responsibly, "there are many benefits and features offered with credit cards, MacMillan notes. "These can include rewards points or cashback as well as insurance protection like extended warranty coverage or cell phone insurance. They can also include lower introductory rate incentives and appealing card designs."
"Say someone steals your credit card and runs up hundreds in charges before you realize it's gone. Federal law says you're on the hook for no more than $50. And many credit card companies won't even expect that, so long as you're quick to report the fraud," says Lowery.
With a debit card, "federal protections aren't as strong," she adds. "You could be on the hook for much more, depending on how quickly report the fraud."
Using a Debit Card vs Credit Card
Casper says it's best to use a debit card where you would normally use cash or write a check.
"This can include transactions at restaurants, food shopping, gas, or monthly bills like utilities or gym memberships," he says.
Credit cards, on the other hand, are often best used for bigger ticket items like travel, appliances, and electronics, adds Casper.
"Do not use a credit card if you can't afford to pay the balance off monthly, manage the minimum monthly payment, or already have significant debt," Casper suggests.
Assume your washing machine breaks down.
"You've been expecting it and saving up, so you have the cash to pay for it outright. But you've also been eyeing a new credit card with a stellar sign-up bonus. Now is your moment," explains Lowery. "You can open that new card and use it to buy your new washer. Often, you'll get an automatically extended warranty thanks to the credit card. And you'll be on your way to earning that sign-up bonus. Just be sure to completely pay off the balance during that billing cycle to avoid accruing interest."
Lowery gives another hypothetical.
"Say it's holiday shopping season and you have a tendency to overspend," she says. "Then, you're not sure how you're going to pay all your bills by the time the tinsel and lights have lost their glow. Good thing you have a debit card connected to your checking account. It's a self-limiting situation since you can't spend more than what's in your account and you won't be able to run up a bunch of debt."
Used responsibly, a credit card is smart to have.
"Using a credit card is an excellent way to put a little money back in your pocket with rewards," says Lowery. "Plus, it helps you build or maintain a positive credit history and protect your identity and money."
Casper believes everyone should have a checking account and obtain a debit card.
"It's safer than carrying cash and is nearly accepted everywhere," says Casper.
But Marvin Smith, credit coach and author of "The Psychology of Credit," recommends not using your debit card for online purchases. That's because if your debit card information is stolen, it can deplete your checking account and you may be responsible for some or all of those lost funds. Before using a debit card online, check the terms of your agreement. Or shop using escrow methods like PayPal, which you can link to your debit card.
"The bottom line is that it's not bad to use a credit card or debit card if you use it wisely. It can help you get what you want, even though you may not have the money," says Smith.