You get to the register and open your wallet. If you’re like me, you pull out your fancy piece of plastic: either your debit card or your credit card. But is there really a best choice on which one to use? Is there a reason you should switch back and forth? Maybe, you make a decision based off of which one has the availability? There are several key differences between credit cards and debit cards — here’s when you might want to choose one over the other.
Your debit card is basically like a plastic check: When you make a purchase, it takes the money directly out of your checking account. So, if you try to spend $500 but only have $250 in your account, your transaction will be declined. Because the money is taken from your account as soon as you swipe, you won’t get a bill and you won’t pay interest. You might, however, face overdraft fees if you spend more money than is in your account. If you have courtesy pay on your account, it will help you cover what you overspent for a small fee. Debit cards also work as ATM cards, allowing you to take cash directly out of your bank account.
Debit cards are convenient, safer than carrying cash and make it more difficult to spend money you don’t have.
Your credit card, unlike a debit card, is a loan: When you open a credit card, you’re approved for a certain line of credit. Also known as your credit limit, a line of credit is how much you can spend before your card is “maxed out” and can no longer be used for purchases. Each month, you’ll get a bill for the amount you spent. Though you’re only required to cover the minimum payment (and not the whole balance) by the due date, you’ll pay interest on whatever balance remains. Because credit cards have interest rates, we recommend paying your bill in full each month to avoid interest fees completely.
Important Advantages of Credit Cards
If you only use your debit card, you’re missing out on all the ways credit cards can benefit you:
1. Help you build a positive credit history
2. Provide protection if your card is lost or stolen
3. Offer rewards on purchases you’re already making
4. Give a “free” month-long loan (when you pay your bill in full)
5. Provide flexibility when booking a hotel or renting a car
What If You Pick “Credit” When You Swipe Your Debit Card?
When using your debit card, you often have the option to pick a “credit” transaction, which requires a signature rather than a PIN (personal identification number). But it’s important to note choosing credit won’t make your debit card act like a credit card. It doesn’t help you establish credit history, and it doesn’t give you additional consumer protections. Instead, selecting “credit” or “debit” just determines how the merchant processes the card and how long it will take to come out of your account. A debit is instantly taken out whereas credit may take a day or two. Either way, you must have the money in your account at the time of purchase.
In a nutshell: Debit cards draw money from your bank account. Credit cards allow you to borrow money that must be repaid. There are pros and cons to each type of card.
Whether you’re looking for a checking account with a debit card or a credit card, we are here to help.