Using Debit vs. Credit Cards in Everyday Life
Which Is Best?
Debit cards and credit cards may look alike, but they work differently. You can use either to quickly and easily pay for things, whether you’re buying online or in person. You can even get cash with either form of plastic. But they serve different needs, and it’s critical to know where each option excels.
To maximize your security and avoid hassles in your bank account, it’s probably best to use a credit card for everyday spending. But you need to pay off the card every month to avoid interest costs, and annual fees may make credit cards less appealing.
At first glance, fees might make you favor debit cards as you evaluate debit vs. credit cards. The worst fee you may find in a typical debit card is a potential POS fee — charged when you use your PIN number for purchases with a retailer. While the tide is shifting away from banks charging those fees, you may still encounter them. Prepaid debit cards are another story altogether because they are not pure, bank-linked cards. Some prepaid cards have created a reputation for charging high fees, although some cards keep charges to a minimum.
Credit cards charge interest, but you can avoid those charges if you pay off your card every month. You may also face annual fees with credit cards, but not all cards charge fees.
Consumer protection varies when it comes to debit and credit cards. Lawmakers place debit cards and credit cards into different categories. But to make debit cards more attractive, some issuers offer a similar level of protection that make debit cards almost as safe as credit cards — but there are still differences. The biggest problem may be that you expose your checking account to the world with a debit card (see below). For details on how the laws differ, see Debit vs Credit Liability (if your card is missing, see Lost Debit Card? Act Fast!).
With credit cards, your loss is limited to $50 worth of fraudulent charges. But with debit cards, you must report those errant charges within two days to limit your loss to $50. If you wait too long, you may be fully responsible for somebody else’s purchases.
When you use plastic at some retailers (gas stations, in particular), the merchant may “block” your card. That means they pre-authorize your purchase and reserve money in your account — typically $50 to $100. They don't know exactly how much you'll buy, but they want to make sure you can afford it. If you only buy $20 worth of gas, merchants don’t release the remaining amount immediately — that process can take several days. During that time, you’re unable to use the blocked money, which might cause you to bounce checks or incur overdraft charges.
There is no difference in how retailers block debit vs. credit cards. But pre-authorizations on your credit card just use a portion of your credit line — they don’t prevent you from spending money you have in your checking account.
Opening Your Account to the World
Your checking account holds liquid cash that you're planning to use soon. When you use your debit card, you put that cash at risk. Any retailer can make a mistake and withdraw too much money, leaving you short on funds (at least for a while). Furthermore, you might use your PIN all over town to make “debit” purchases and ATM withdrawals. If that number (intentionally or accidentally) gets into the wrong hands, scammers have an easier time getting to your account. Again, you might get your money back after you prove it was fraud, but that takes time and energy.
Overdrafts and Rubber Checks:
Using your debit card as you run around town doing errands can create bounced checks and overdraft costs. Even a $4 sandwich can create a $40 overdraft charge. Why not just use credit? Even a $60 annual fee on your credit card is a small price to pay for knowing you won't bounce checks and start a chain reaction of overdraft fees.
Not Accepted Everywhere You Want to Be:
Most of the time, nobody will know or care whether you're using a debit card or a credit card. However, some companies treat these cards differently. Rental car companies have been known to demand a real credit card and deny debit cards when you try to reserve a vehicle. Their justification may be that a credit card implies a minimum level of creditworthiness and responsibility.
Giving up Free Money
A common reason for using debit cards over credit is that you're spending money you actually have — and avoiding interest charges from the credit card company. But if you have enough money for your purchase, why not use a credit card and take advantage of the 30-day grace period? As long as you don't carry a balance on your credit card — and you presumably wouldn't have a balance if you use the reasoning above — then you can generally pay off all your purchases monthly without paying interest.
To maximize interest earnings at your bank, keep your cash in a high-yield savings account. Then, pay off the card balance every month to avoid any interest charges from your card issuer.
Washington State Department of Financial Institutions. "Debit Cards Frequently Asked Questions," Accessed Nov. 11, 2019.
U.S. Government Information and Services. "Credit Cards," Accessed Nov. 8, 2019.
Federal Trade Commission. "Lost or Stolen Credit, ATM, and Debit Cards," Accessed Nov. 8, 2019.
Federal Trade Commission. "When a Company Blocks Your Credit or Debit Card," Accessed Nov. 12, 2019.
Consumer Financial Protection Bureau. "What Is a Grace Period for a Credit Card?" Accessed Nov. 8, 2019.