Credit Cards vs. Debit Cards: One Is Markedly Better Than the Other

You’ve probably heard the question a million times: “Debit or credit?” But have you ever asked yourself which one is actually best?

A debit card is linked to your checking account and a PIN, and deducts money from your balance when you use it to pay for purchases. You can also use your debit card to pull out cash from an ATM or get cash back in certain stores.

If you make a purchase for an amount that exceeds your available balance, you may be hit with an overdraft charge. Your account will show a negative balance until you make a deposit to bring it back into the black. Many banks allow you to link your checking account to another account, such as savings, to cover overdrafts. However, a fee is usually still charged for this protection. Alternatively, you can opt out of overdraft protection. In this case, any transaction that exceeds your available balance is declined.

Walsh also points out that unlike a credit card, using a debit card doesn’t impact your credit.

Though it’s also a piece of plastic you can swipe to make purchases, a credit card works differently from a debit card. Credit cards are linked to a revolving line of credit that you can draw against as needed. You may carry a balance month to month, but you’ll be charged interest. You will also be required to make a minimum payment, otherwise you could be charged an additional fee.

However, these perks don’t mean there aren’t any potential downsides to using credit. “Credit cards typically offer better cash back or rewards (than debit cards), but also typically come with high interest rates and annual fees,” Walsh says. Also, because credit card activity is reported to the credit bureaus, missing payments or accumulating a high balance could harm your credit score.

Aside from how you can spend, a big difference between debit and credit cards is how fraudulent purchases are handled.

If your physical card or debit card information falls into the wrong hands, a criminal has direct access to all the money in your checking account. Whatever is spent fraudulently is immediately gone from your balance, and you’re out the cash until the situation is sorted out.

“If you have additional accounts linked to your debit account, such as a savings account for overdraft protection, these accounts would also be vulnerable,” says Dan Wilke, founder of the personal finance blog Credit Liftoff.

Whether the situation is resolved in your favor depends largely on how quickly you’re able to catch and report the unauthorized charges. “There are strict timelines in place for fraud reporting, and if consumers do not catch it early, they may be liable for fraudulent charges,” Wilke says.

For example, if your card or PIN is lost or stolen, you must notify your bank within two business days of discovering the loss in order to limit your liability to $50 or less. However, if you notify your bank after two business days, you might be liable for up to $500 in fraudulent charges. These rules apply to the unauthorized use of your debit card as well as other electronic fund transfers, such as ATM transactions, some online bill payments and automatic payments.

In some cases, you might not realize that fraudulent use of your debit card has occurred until much later, like when you’re reviewing your account statements. If you notice fraudulent charges on your statement, you should contact your financial institution within 60 days. You’re still liable for up to $500 during the 60-day window but not for any additional charges as long as you report in time. If you wait more than 60 days to report the issue, you might be responsible for all transactions between the 60-day mark and the date you inform your bank, if it can be proven that notifying them earlier would have prevented those charges from occurring.

On the other hand, the Fair Credit Billing Act provides credit card users with extensive protections that are not available to debit card users, Wilke says. For example, if your credit card is lost or stolen, you are responsible for no more than $50 in unauthorized charges. Often, card issuers will not hold cardholders liable for any unauthorized charges at all. And if you have your physical credit card but the account number is stolen and used to make fraudulent charges, you aren’t liable at all.

Plus, since credit card purchases are made against a line of credit and don’t draw directly from any bank account, your personal funds aren’t put at risk if the card is used fraudulently. “Fraud investigation with credit cards can take time to process just like debit cards, but you will not be out any money during the investigation,” Wilke says.

Although credit cards tend to be the safer option from a fraud perspective, it’s not always the best option. There are a few situations when it makes sense to use a debit card instead of a credit card:

Still, credit cards can be more advantageous in a few circumstances:

Deciding whether to use a debit or credit card comes down to your financial situation and spending habits.

If you struggle with spending, Walsh says it’s wise to stick with a debit card. “The general idea is when you pay with cash or a debit card, you experience more pain subconsciously because it is tangible and immediate,” he says.

Additionally, you should use a debit card if you’re already carrying a credit card balance. “Credit cards typically come with extremely high interest rates, so carrying a balance is very expensive,” Walsh says. “Spending on a credit card not only makes it more likely you will overspend, but it also makes tracking your debt paydown progress difficult.”

On the other hand, if your spending and debt are in check, using a credit card is the more financially rewarding option. “Responsible credit card use comes with obvious perks, such as cash back or rewards, but it can also help you build credit and better manage cash flow,” Walsh says. Just be sure that if you do put the majority of your purchases on a credit card, you maximize its benefits by tracking your spending, planning how you’ll redeem rewards and avoiding unnecessary fees.