Debit vs. Credit Card: What’s The Best Way To Pay?

Debit and credit cards look similar, but they allow you to spend money differently. And they don’t have the same impact on things like your credit score, interest charges or rewards potential.

Some people assume debit is safer than credit, but it’s usually the other way around. Others don’t realize that using a credit card can help build the credit score needed for a car loan or mortgage.

Is credit always the best choice, or are there times when it’s better to use a debit card? Learn more about how debit cards work versus how credit cards work and when each one is right to pull from your wallet.

Debit card vs credit card: What’s the difference?

The main difference between debit cards and credit cards is where the money comes from when you make a purchase.

Debit cards let you spend directly from your checking account balance. That means your spending limit is whatever’s in the account, and you’ll likely be charged an overdraft fee if you spend more than you have.

Credit cards let you spend from a line of credit that you pay back later. While you don’t have to pay off the whole bill every month, you’ll start accruing interest charges on any unpaid balance. Using a credit card responsibly can help improve your credit score — but late payments or a high credit balance can also hurt your score.

Note that both debit and credit cards come with a unique number, usually 16 digits, and can be used to make payments both in person and online. Both can also be added to digital wallets or payment apps.

Is debit or credit used more?

The Federal Reserve reports that American cardholders, businesses and governments made 89.1 billion payments with non-prepaid debit cards in 2022. That’s more than the 55.3 billion payments with credit cards. However, the value of those credit card payments ($5.42 trillion) was more than one-third higher (36 percent) than the debit card payments ($3.99 trillion), implying that people spend more on credit cards even if they don’t use them for as many individual purchases.

Additionally, the latest Bankrate Credit Card Debt Survey shows that 3 in 4 Americans (75 percent) have a credit card. But with nearly half of those cardholders (48 percent) carrying a balance — and likely collecting interest charges — it’s worth considering whether a credit or debit card is right for you.

When should I use a debit card?

A debit card can come in handy if you prefer to pay with cash or don’t want to overspend. Here are a few scenarios worth keeping a debit card in your wallet for.

When you’re trying to stay out of debt

Sometimes overspending and interest charges are the culprits of credit card debt.

If you have a tendency to spend beyond your means, a debit card could be handy as it will only let you spend money you already have. This is similar to the cash stuffing budget method, where you only make purchases with cash you’ve allocated into envelopes. Once the cash is gone, it’s gone.

When you need cash

If you need to withdraw money at an ATM, debit cards are the best choice. If you visit an ATM associated with your bank, you likely won’t pay a fee.

But if you use a credit card to take out a cash advance, the issuer usually charges a fee. Plus, the interest rate for a cash advance is typically much higher than the regular interest rate, and there’s no grace period. That means a cash advance from a credit card starts accruing interest immediately.

When you want to avoid interest charges

The average credit card interest rate currently hovers above 20 percent, which means a credit card balance can grow quickly from month to month. If you’re paying off high-interest credit card debt, you may want to set that card aside and make your everyday purchases with a debit card for now. That way, you won’t rack up an even higher balance.

When should I use a credit card?

Credit cards are flexible tools that allow you to borrow money, build credit, earn rewards and pay securely. Just keep in mind that the way you use a credit card will affect your credit score. Here are a few instances when a credit card is the right move.

When you want to earn rewards

Three in 5 Americans (60 percent) have a rewards credit card, according to Bankrate’s Credit Card Rewards Survey. If you can qualify for the best rewards cards, you can earn points, miles or cash back on purchases you’re already making.

Although a few debit cards offer cash back, you won’t earn as many rewards with debit as you will with credit. While some rewards checking accounts give you 1 percent cash back on debit card purchases, the best cash back credit cards give you at least 1.5 percent on general purchases and as much as 6 percent cash back on things like groceries, dining and entertainment.

You can get even more bang for your buck by earning travel rewards. If you’re looking for a rewards credit card, compare cash back versus points and miles cards to pick the card for your lifestyle.

When you want to build your credit score

Having a strong credit history and good credit score can help you qualify for things like car loans, mortgages and future rewards cards. Plus, that higher score means you can qualify for better terms and pay less in interest.

Using a credit card responsibly lets you practice good habits like making on-time payments and maintaining a low credit utilization ratio. If you’re starting from scratch, there are even credit cards for people with no credit history.

A 750 or 800 credit score doesn’t happen overnight, but having good credit card use and on-time repayment reported to the credit bureaus can lead to future loans and lower interest rates down the road.

When you’re shopping online

If you’re an online shopper, one of the safest ways to pay online is with a credit card. Credit cards offer fraud protections that debit cards may not, like zero liability coverage, encryption and artificial intelligence (AI) fraud monitoring.

For even more security, you can add your credit cards to a digital wallet (it’s an additional security step you can take with debit cards, too). None of your actual card numbers are stored in the wallet — only encrypted information that’s shared when you make an online payment. Tokenization is another tool that adds a layer of security to digital wallets.

When you booking a hotel or rental car

If you’ve ever paid for a rental car, hotel or even a tank of gas with a debit card, you know that merchants sometimes put a hold amount on your card to cover expected or possible expenses. That amount could be $20 if you’re buying a tank of gas or it could be $200 dollars if you’re renting a car or booking a hotel room. With debit cards, that means that money in your account is not available to you until the hold is lifted. It also means you’ll need to have that amount in your account at the time of purchase.

Merchants can and do put holds on credit cards, but in that case it isn’t your money that’s tied up in the hold — it’s just a slice of your available credit.

Debit or credit card: Which is safer?

Both debit cards and credit cards come with fraud prevention measures. When you use a debit card, you’re often required to enter a PIN. When you use a credit card online, you may be asked to enter a three-digit security code.

Banks and card issuers — now with the help of AI — also look for transactions that could be fraudulent. Keep an eye out for mobile alerts notifying you of suspicious charges or unusual activity. Note that scammers may also send phishing messages pretending to be your bank, so know how to protect yourself from bank fraud.

That said, credit cards offer fraud protections that debit cards don’t. Credit cards are required by law to cover the costs of fraud after you report your card lost or stolen, which means you won’t owe a penny on unauthorized charges. Even if the purchases are made before you realize your card is missing, you’re still only on the hook for a maximum of $50. Know your rights when facing credit card fraud.

Under the Electronic Funds Transfer Act (EFTA), debit cards offer a $50 liability limit if you report a lost or stolen card within two business days. If you report within 60 days, your liability goes up to $500. After 60 days, you could be liable for any fraudulent charges.

In general, credit cards are safer from fraud. You may have time to dispute an unauthorized credit card charge before you’re liable for payment. But funds are drawn from your bank account immediately with a debit card, making it harder to dispute the charge and get your money back.

The bottom line

By using a credit card responsibly, you can build your credit score, earn rewards and have protection from fraud. But if you struggle with overspending, a debit card can help you stay out of high-interest debt.