Since they look similar and both are cards used to pay for things, it can be confusing to know when you should use a debit card and when it makes more sense to use a credit card. Below is a guide explaining which card to choose for a range of situations.
What is the difference between a debit card and a credit card?
Debit cards are typically linked to your checking account. When you use your debit card, the full purchase or payment amount is automatically withdrawn from your linked bank account the same business day or within the next two days.
Credit cards can also be used for payments and purchases, but instead of withdrawing immediately from your linked bank account, you can delay one or several payments, up to the loan amount agreed to as your card’s credit limit. You’ll receive regular statements with all of the purchases and payments you charged to your credit card, usually every 30 days, along with a specified due date for your payment. You can pay the full amount incurred over the billing cycle or pay as little as the minimum due. Any unpaid balance carries over to the next billing cycle, and you’ll incur interest charges on whatever balance remains unpaid.
For everyday spending within your budget: use a debit card
Debit cards can be used almost like cash: for purchases and payments you know you can afford, that you might otherwise use cash or a check to pay for.
Many people use their debit card for everyday discretionary purchases within their monthly budget.
When using your debit card, it’s important to be mindful of your available funds, to avoid potential overdraft fees and credit score consequences.
For financing larger purchases: use your credit card
Credit cards allow you to borrow money within a certain credit limit from your credit card issuer. Because the funds don’t come straight out of your linked bank account, you can use credit cards to delay payments -- for purchases and payments outside your monthly budget or above the current available balance in your checking account.
With a credit card, you can spread repayments over a few weeks or months. If possible, repay the full amount within the 30-day payment cycle. If you need to, you can opt to extend the payment over more than one billing cycle. Whenever you don’t pay full the amount within a billing cycle and extend it to the next, you’ll pay interest on the balance.
For earning points or rewards: use your credit card
Some people use their credit cards for everyday purchases and payments as a strategy to earn more points and rewards. Typically, these users pay the full balance before the end of their 30-day billing cycle to avoid paying interest charges.
For example, instead of using your debit card to buy groceries, you’d use your credit card at the checkout, earning the perks and rewards associated with the credit card, but paying off the balance as quickly as possible, almost like a debit card’s automatic withdrawals. It’s a smart way to earn a credit card’s perks - as long as you’re mindful of your spending and can pay for your card charges within your current billing cycle.
When you’re trying to raise your credit score: use your credit card
Regular, responsible use of your credit cards offers the opportunity to improve your score. By establishing a pattern of responsible spending, consistent on-time payments and using less than 30% of your credit limit to lower your utilization ratio, your score will begin to go up.
A higher credit score can help ensure lower interest rates on future loans and cards and expand your access to credit, from car loans to home mortgages.
When you need cash: use your debit card
When you use your debit card to withdraw cash at an ATM, you’re withdrawing funds directly from your linked bank accounts. Some ATMs charge fees, depending on your bank’s ATM network and policies.
Some credit cards also offer access to cash but typically as a cash advance that comes with separate fees and interest rates. When you use a credit card for cash, you’re essentially getting a loan from your credit card issuer.
Unlike your purchases or payments made with a credit card, where you have a month grace period for repayments, interest begins accumulating right away on cash advances.
When it comes to withdrawing cash, stick to your debit card.
What's better debit or credit cards.
When there’s an emergency: use your emergency fund
If an emergency strikes, bringing unexpected expenses, it’s best to turn to an emergency fund -- special savings set aside, with easy access when you need it most. Ideally, you can transfer money from your emergency fund immediately, on demand, to your checking account, so it’s accessible with your debit card.
But if the expense takes more than your emergency fund allows, use your credit card and the extra spending allowed with your credit limit. But try not to use your credit card for emergencies. The interest you’ll incur will only add to the pressure of your crisis.
You’ll have extra time to pay off the unanticipated expense, creating some flexibility in a tight moment.
Whenever you can earn rewards: use a secure rewards card
Some credit cards offer perks or rewards for specific purchases, like gas, groceries or travel. Take advantage of the cashback or other incentives offered by your card.
Gas stations, in particular, have a reputation for weakly-protected payment infrastructure. There’s a possibility that a pump has been outfitted with a hidden card reader called a “skimmer,” which can steal your card information.
In that unfortunate scenario, you’re better off using a credit card, with the power to dispute suspicious transactions. Debit card fraud can be harder to resolve.
Rely on Bright to manage your credit cards
Bright can ensure your credit cards get paid on time every month and paid off faster.
Bright’s MoneyScience™ AI studies your spending habits and analyzes your card debt, looking at your balances, APRs and interest charges. Then we make smart payments for you, always on time and optimized to get you debt-free fast, automatically.
Bright also builds you a personalized budget, so you can see your spending habits and use your debit cards wisely every day, even adapting as your finances shift.
If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your checking account and cards in a snap, set a few goals and let Bright get to work.