What’s Better for Everyday Use, Debit or Credit Cards?

We all want to make better choices when it comes to managing our money. Depending on our circumstances and financial goals, everyday spending or, worse, unexpected expenses can feel less like a necessity and more like a burden. So how do you decide when to use money you have at the ready or rely on credit?

When to use a debit or credit card for a purchase and why are common questions. Knowing the difference between these payment types and understanding their distinct uses can help you make more empowered choices and get you closer to where you want to be financially.

Debit vs. Credit Cards at a Glance

While debit and credit cards may look almost exactly alike in your hand or wallet, there are some clear differences between the two and how they function. Here’s a quick summary of how they work respectively.

Learn More: Can You Build Credit With a Debit Card?

When to Use a Debit Card

Debit cards work by drawing directly from your bank account, so when you make a purchase, the money is automatically deducted from your balance. Because of this, you don’t incur an interest charge on your purchase; in fact, many banks may reward you for using your debit card consistently. Debit cards also allow you to make cash withdrawals from an ATM as needed without penalty (so long as you use an ATM in your bank’s network).

We should note that one type of debit card, a prepaid debit card, is not linked to any bank account, but instead allows you to spend money that you’ve loaded onto your account.

Using a debit card can have limitations. For instance, debit cards may not offer the same level of protection as credit cards should you lose your card or have your information stolen. Ask your financial institution about their fraud protection program for checking accounts and/or debit cards.

With all this in mind, consider using a debit card for:

• Smaller purchases you can easily pay for all at once
• Monthly expenses or items you’ve budgeted for
• Vendors, businesses, or locations you trust
• Making cash withdrawals from the ATM or getting cash back with a purchase

Learn More: 8 Debit Card Benefits That May Surprise You

When to Use a Credit Card

A credit card is a form of payment linked to a line of credit that you have with a bank, credit union, or other card-issuing institution. Generally, the card issuer allows you to borrow money up to a certain limit and pay it back, often with interest. As such, credit cards provide a level of flexibility that can be beneficial for managing larger expenses while boosting your credit score. Credit card companies also typically offer greater coverage, including zero-liability fraud protection, should your information fall into the wrong hands.

Unlike a debit card, when you apply for a credit card, factors such as your income and credit history will determine what limits and interest rate you may qualify for. While there are cards for people across the credit spectrum, cards with the best terms and benefits are typically reserved for people with good or excellent credit. Some credit cards, called secured credit cards, may extend credit even if you have a poor credit score by providing an upfront security deposit to secure that credit line. This deposit is returned when you close the account or sooner, depending on the terms.

While you can certainly build a good credit history using a credit card, the opposite is also true. This is especially the case if you maintain a large balance relative to your credit limit or you miss a payment by 30 days or more. Make sure you use your credit card responsibly to avoid negative credit impacts.

This is why consumers often choose to use credit cards for:

• Expensive items that you wish to pay for incrementally
• Purchases in categories or at designated businesses that will earn rewards (i.e., gas or travel)
• Use while traveling internationally
• Emergency expenses

Learn More: Financing vs Paying Cash

The Bottom Line

Considering all that we’ve talked about here, it’s no wonder that many people choose to use a combination of debit and credit cards for their spending. This way, you can avoid debt and overspending while reaping the benefits of financial flexibility and credit building.

When reviewing your finances, think about your goals and what type of payment will help you get there. It’s normal to have seasons of more or less spending, which may line up with when and how you use your debit or credit card, so long as you keep an eye on how your purchases add up.

Don’t hesitate to ask a financial advisor and your community banker for more information about how these payment types work and how to leverage them toward your financial goals.