Credit Card vs. Debit Card: Which Is Better?

According to a 2022 Gallup survey, 64 percent of Americans expect the U.S. to become a cashless society at some point during their lives. This means consumers will use a credit card, debit card, or another form of electronic payment instead of paper currency to make all business transactions.

Although a completely cashless economy sounds almost like the stuff of sci-fi, the reality is that many people have already stopped paying cash for most goods and services in favor of credit and debit cards.

Credit cards and debit cards offer several advantages over paying cash, including convenience, security, and perks such as airline miles, cash back, or points that can be redeemed for products. They even look practically identical. 

However, these thin plastic or metal rectangles have some significant differences. But are the differences between debit and credit cards enough to make one of these methods of payment better than the other? 

Let’s jump into the credit card vs. debit card debate and find out.

What is a credit card?

A bank or financial services company issues credit cards. A credit card provides access to a line of credit that allows you to borrow money from the card issuer to purchase items or to withdraw cash.

Credit cards have spending limit caps, and you pay back the money you spend (i.e., borrow) with interest according to the lender’s terms.

Benefits of Using a Credit Card

When used responsibly, credit cards provide significant financial benefits.

For example, making payments on time or paying your credit card off every month is a great way to build your credit history and improve your credit score. Additionally, many credit cards offer perks or rewards that accrue the more you use your card for qualified purchases.

Credit cards also provide an extra layer of protection against fraud and theft. If your card is lost, stolen, or skimmed, lenders will reverse the charges you didn’t make and issue a new card.  

Credit card issuers also allow you to dispute charges that are made erroneously or for goods and services that were not as advertised, though the reimbursement process will require you to provide documentation.

Drawbacks of Using a Credit Card

Because they are technically a loan, using a credit card does come with financial risks. 

One of the most common issues is that high spending limits and delayed payments make it easy to overspend and rack up debt quickly. The higher your credit card balance, the more you will end up paying in interest and fees each month.

Late or missed payments can hurt your credit score, which will impact your ability to make larger purchases, such as a car or a home.

Additionally, some vendors charge a “convenience” fee for credit card purchases to offset the fees they have to pay to the credit card company. 

Find out how to fund your financial future.

What is a debit card?

Banks issue debit cards to their checking account holders in lieu of a paper checkbook. When you make a purchase using a debit card, the money is automatically withdrawn from your checking account.

Unlike a credit card, your spending limit with a debit card is determined by the amount of money you have available in your bank account.

Benefits of Using a Debit Card

Debit cards offer users many of the same conveniences and consumer protections as credit cards. 

The primary difference between the two is that when you make purchases using a debit card, the money is immediately deducted from your checking account, so you don’t incur any debt. And as a bonus, checking accounts earn interest each month rather than charging it. 

Drawbacks of Using a Debit Card

Although a debit card doesn’t pose the same risks as a credit card, there are a few drawbacks to using a debit card instead of a credit card.

The most significant is that using a debit card doesn’t help build your credit history because you aren’t borrowing and paying back money from a lender. However, overdrafts can hurt your credit score if you spend more money than you have in your checking account.

Also, many standard debit cards don’t offer the perks and rewards that can save you money on travel, groceries, or other goods and services. 

Credit Card vs. Debit Card: How do you find the best fit?

Knowing the main benefits and drawbacks of credit cards and debit cards, can we definitively say that one is “better” than the other? Not really.

Like many things, it all depends on your specific goals and circumstances. Here are some examples of when to use a credit card vs. a debit card:  

Use a credit card if:

• You want to build credit.
• You like earning rewards.
• You want extra protection against fraud.
• You are disciplined about using credit responsibly and making payments on time

Use a debit card if:

• You want to avoid debt.
• You like to keep a tight rein on spending.
• You have bad credit.
• You want to access cash via ATM.

Technically, some debit cards do offer rewards, but they aren’t as robust as those you get from a credit card. Likewise, you can get a credit card cash advance from an ATM, but you will pay high fees.

Why not both?

We haven’t reached the cashless age yet, but there’s no denying that, as a society, we are using far more electronic payment methods than paper currency.

There are benefits and drawbacks to both credit cards and debit cards. But with a little planning and self-discipline, you can avoid the pitfalls, take advantage of the benefits, and use both to support your personal finance strategy. 

For more tips on managing money, budgeting, and setting long- and short-term goals, download The Millennials’ Guide to Personal Finance.