When Should You Use Your Debit Card Rather Than Your Credit Card — And Vice Versa?

Credit and debit cards bear a superficial resemblance to one another, but it’s what goes on behind the scenes when you use them that truly distinguishes them. Consequently, some transactions are better suited to one type of card rather than the other.

Read to learn more about the main differences between credit and debit cards and how to maximize the purchasing power available to you with both forms of payment.

How does a debit card work?

In the simplest terms, a debit card is a reusable, plastic version of a traditional check. It is issued to you by your bank and backed by the funds in your checking account.

When you make a purchase using your debit card, you’re spending your money, and the funds are deducted from your checking account. If sufficient funds are unavailable, the bank has the option — depending on the arrangement you’ve worked out with them — of honoring the charge and charging you an insufficient funds fee or declining the charge.

To complete a debit transaction, you will either need to enter a personal identification number (PIN) or sign a sales receipt.

From a merchant’s perspective, a debit card is as close to cash as you can get without using bills and coins. Moreover, the transaction and processing fees associated with debit card use are typically smaller than those associated with credit cards.

How does a credit card work?

By contrast, you’re not spending your money per se when you use a credit card — at least not initially. When you purchase something with your credit card, you’re borrowing money against a line of credit, also known as the card’s credit limit. The financial services provider that has issued the card pays the merchant, you are billed for the charges, and you, in turn, pay your creditor.

It’s also important to note that you’re incurring interest on your purchases when you use a credit card. These interest payments can add up if you carry an unpaid balance from month to month. Moreover, both your outstanding credit card balance(s) and payment history can affect your credit score.

Paying your balance on time and in full will help you avoid interest and late fees and maintain or even improve your credit score. Here are a few other things you need to know about credit cards.

• The provider issuing the card sets the credit limit based on your credit history.
• According to the most recent data collected by the Federal Reserve, the average credit card interest rate is approximately 15%.
• You’ll owe interest on your purchases if you don’t pay them off in 30 days.
• Since mid-2018, the major credit card companies no longer require a signature for most purchases. They now rely on more advanced security features, including EMV chips, to protect against fraud. Many debit cards are now also “chip cards.”

When does it make more sense to pay via credit card?

Here are four scenarios in which you might benefit most by using your credit card instead of your debit card.

1. Shopping online. When shopping online, credit cards are often the safer option. Because fraudulent charges are a significant liability for credit card issuers, they tend to be extremely vigilant about suspicious account activity. If you detect fraud yourself, you can dispute the charge and get it corrected quickly. By contrast, debit purchases are equivalent to cash. That means they are sometimes protected, but these policies usually vary from bank to bank.
2. Large purchases. Most credit cards offer warranty protection for your purchases just for using the card to complete your transaction. Some of these warranties go beyond what the manufacturer provides, offering additional coverage — and peace of mind — for major electronics, appliances, and other big expenses.
3. Travel and vacations. When you’re away from home, the fraud protection offered by credit cards can be crucial if someone steals your card or if you use an ATM that has been configured to collect card data illegally. Using your credit card to cover travel expenses also often comes with various perks, such as frequent flyer miles, rental car discounts, and cashback on purchases. Finally, many hotels, airlines, and other travel-related companies will only accept credit cards.
4. Work-related expenses: If you have to travel for work, you’ll likely have to cover the costs of hotel stays, meals, and car rentals, among others. If you use cash or a debit card, you’re immediately taking money out of your own pocket. By using a credit card, you can charge these expenses, submit your expense report, and secure reimbursement before the payment comes due.

When does it make more sense to pay via debit card?

In certain circumstances and depending upon your financial goals, choosing to pay with a debit card can unlock unique benefits.

• Control spending. Using your debit card is one way to avoid getting into excessive credit card debt. According to a recent Bankrate study, about 12 percent of Americans say paying off credit card debt is their biggest financial challenge. And the situation worsens if you fall behind on payments thanks to added penalty fees and accumulated interest. On the other hand, debit cards deduct charges as you go without charging interest. Since a checking account balance is a harder spending limit than a credit card maximum, using your debit card can help keep you from cheating on your budget. If credit card debt is a problem for you, it’s a good idea to use your debit card only until you get your finances under control.
• Get merchant perks. Rewards are not always limited to credit cards. To avoid credit card processing fees, some merchants and other retailers may offer incentives to customers who pay with debit cards or cash.
• Avoid unnecessary fees. Many banks waive monthly checking fees for account holders who make a certain number of debit card purchases each month.
• Save time. Most debit card payments register immediately, so there are fewer delays than when using credit cards. Credit card “float periods” typically last at least 24 hours. If you need to get money to your payee immediately, choose debit.
• Earn interest. With a credit card, you’re paying interest. But many banks offer an array of interest-bearing checking accounts with annual percentage yields that accrue dividends as you go about your banking business — including using your debit card. Earning some extra interest just for having money in your account is good compensation for a debit card’s lack of credit-building power.
• Help local small businesses. Paying with a debit card or cash is a great way to help financially stressed local businesses by enabling them to avoid the added expense of credit card transaction fees.

The final word on debit and credit cards

Depending on your personal circumstances, credit can be a powerful and flexible spending option. It comes with beefed-up fraud protection, protects purchases from defects, and helps you handle failures and disputes quickly. However, credit cards are still credit — you’ll pay interest on your purchases, and an inability to manage your credit accounts can lead to serious financial problems. Sometimes it’s better not to spend at all unless you truly have the money to spend, in which case a debit card or cash payment may be the better option.

Overall, it’s probably best to create spending rules for yourself — and follow them. In addition to helping you decide how to pay for specific goods and services, these rules should support your long-term financial goals, such as sticking to a budget and improving your credit rating.

For example, you might keep $40 or so on hand to cover unexpected expenses, use your debit card for everyday expenses, and pull out your credit card for travel, business expenses, and larger purchases.

Since 1913, Guaranty Bank & Trust has been helping Texans save money, spend wisely, and prosper. Learn more about the benefits of banking local by exploring the outstanding features that come with our checking accounts and credit cards. From free debit cards to multiple opportunities to earn (and redeem) points on your purchases, we’ve designed each account to help you make the best financial choices for you and your family.

If you have any questions about banking with Guaranty, simply call 888-572-9881 to connect with our Customer Care Center or request a video appointment. Our friendly, caring, and collaborative bankers look forward to providing you with the exceptional customer service that’s made Guaranty one of the most respected community banks in the Lone Star State.