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You’ve probably heard the question a million times: “Debit or credit?” But have you ever asked yourself which one is best?
Knowing the difference between debit and credit cards will help you decide which option makes the most sense. Read on to find out when using a credit card is best and when a debit card is the better option.
Debit and credit cards work nearly identically when you’re at the register paying for groceries. However, they have some key distinctions to understand.
The main difference is that debit cards force you to spend your own money, while credit cards allow you to borrow it, says Brian Walsh, certified financial planner and senior manager of financial planning at SoFi. Here’s a closer look at what that means.
A debit card is linked to your checking account and a PIN, and money is deducted from your account balance when you use the card for purchases. You can also use your debit card to pull out cash from an ATM or to get cash back at 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 may be charged for this protection. If you opt out of overdraft protection, then any transaction that exceeds your available balance will be declined.
Also, unlike a credit card, a debit card doesn’t affect your credit, Walsh says.
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 or you could owe 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 commonly reported to the credit bureaus, missing payments or accumulating a high balance could harm your credit score.
If your debit card or card information falls into the wrong hands, a criminal has direct access to all of 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.
Whether the situation is resolved in your favor depends on how quickly you’re able to catch and report the unauthorized charges. Consumer liability under the federal Electronic Fund Transfer Act is:
These rules apply to the unauthorized use of your debit card as well as electronic funds transfers, such as ATM transactions, automatic payments and wire transfers.
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 can convince the bank that extenuating circumstances were involved, it must extend your notification timeline for a “reasonable period,” according to Nolo, a publisher of legal advice.
With credit cards, though, the maximum you will owe for unauthorized use is $50. Often, card issuers will not hold you responsible for any unauthorized charges.
Note that if your account number is used but your card is not stolen, you are not responsible for unauthorized credit card charges. You won’t be liable for unauthorized transactions with your debit card number if you report them within 60 days after the statement showing the charges is sent to you. Always review your monthly statements and make sure they match your receipts.
Although credit cards tend to be safer from a fraud perspective, they are not always the best option. Here’s when to use a debit card instead of a credit card:
Still, credit cards can be more advantageous if you want to:
Deciding whether to use a debit or credit card comes down to your financial circumstances and spending habits.
If you struggle with spending, then stick with a debit card, Walsh says. “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, a credit card is the more financially rewarding option. Just be sure that if you put most of your purchases on a credit card, then maximize your benefits by tracking spending, planning how to redeem rewards and avoiding fees.
“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.