When To Use a Credit Card vs. Debit Card

Layla Bird / Getty Images

Layla Bird / Getty Images

Both debit and credit cards allow you to shop online and buy things in person without using cash. Both are the same size and shape, both have 15- or 16-digit card numbers, and both may feature the same logo of a service provider such as Visa or Mastercard. Six of one, half a dozen of the other, right? Not even close.

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“Although debit and credit cards may look the same, they are very different financial tools,” said Laura Adams, MBA, personal finance expert at Finder.com. “A credit card allows you to make purchases with borrowed money that you must pay back with interest over time. A debit card allows you to make purchases using your money in a linked bank account.

Responsible credit card use can earn you points, miles, cash back and other valuable rewards. They also help you build your credit and impress future lenders, making credit cards the right choice in many cases. Many, but not all. According to experts, the following scenarios specifically require one or the other.

Credit card: for small recurring expenses

If you have some cards that you no longer use, but don’t want to lose the open credit they provide, you can keep them current by using them to pay for small recurring expenses, like streaming subscriptions.

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“These services don’t charge a lot and ensure your credit stays open and active, which can help boost your credit score, as long as you make payments on time,” said Tom Koesternen, CFA and consultant to The Guaranteed. Loans.

Take our survey: How long do you think it will take to pay off your credit card debt?

Debit Card: For Purchases That Offer a Cash Discount

Some merchants will reimburse you if you allow them to avoid the fees involved in processing a credit card transaction.

“Sometimes paying with a debit card or cash can result in a discounted price,” said Freddie Huynh, vice president of data optimization at Freedom Debt Relief. “This is seen more often in the case of expensive items.”

It’s not just the expensive stuff. Some everyday purchases, like filling up at a gas station, also offer cash discounts that you can get with a debit card. In other cases, stores will reward you for giving up credit cards. Target, for example, offers a 5% discount for linking your checking account to your RedCard debit card.

Credit card: to finance large purchases

It’s never a good idea to use a credit card to make purchases you can’t afford, but if you need to convert an expensive item into payments, strategic use of plastic can get you there.

“If you need to finance a large purchase that takes time to pay off, a credit card is a good option,” said Lauren Davis, founder of the Moolah Project.

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But don’t just throw that grand piano away on a 24% APR card. Davis advises this strategy only with cards that offer a 0% interest introductory period so you can finance the purchase for free.

Debit card: when you try to control yourself

If credit cards have enabled irresponsible spending, there’s nothing like watching your bank balance shrink with each purchase to keep it under control.

“Because debit cards are tied directly to your checking account, it’s harder to overspend and go into debt,” said Lucas Solomon, personal and business financial consultant and founder of FX4Biz. “If you’re trying to avoid using credit cards or going into debt, using a debit card can help keep you on track.”

Credit card: whenever a deposit is required

Some transactions require a deposit in advance if the final invoice is uncertain at the time of purchase. In some cases, such as renting a car or a hotel room, a credit card is required. But even if the merchant accepts a debit card, credit is often a safer alternative.

“When you need to pay a deposit for goods or services, like equipment rentals or travel reservations, using a credit card allows you to dispute a charge and get your money back if necessary,” Adams said.

Debit Card: To Withdraw Cash

When you use your credit card for a cash advance at an ATM instead of your debit card, you’re not withdrawing money, you’re financing a very expensive short-term loan. Cash advances not only come with higher APRs, they don’t qualify as introductory APR purchases and can earn interest to start accruing on balance transfers.

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Cash advances should be a last resort only for the most extreme emergencies.

“If you use your credit card to withdraw cash, the fees charged are not only high, but it’s also not a good measure from a credit score perspective,” said Damian Serwin, budgeting expert and co-founder of Why Budgeting. “Lenders see this because you can’t budget your money the right way.”

Credit card: online purchases

There are very few situations where it makes sense to use a debit card for e-commerce. In the case of online fraud, which is a very real risk, it is much easier to get a credit card company to cancel a purchase than it is to get a bank to refund the stolen money.

“Having your debit card information on the Internet is risky, which makes credit cards a better option for shopping online,” Koesternen said. “While debit cards are chip-enabled and help deter fraud in person, the chip isn’t very effective at protecting you online. Therefore, please avoid saving your debit card information online or choosing it as your preferred payment method.”

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This article originally appeared on GOBankingRates.com: Experts: When to Use a Credit Card or Debit Card


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