Credit cards vs. debit cards: Which should you use?

Owning a credit card or debit card is as much a part of the American experience as baseball, backyard barbecues, and apple pie.

Hundreds of millions of active credit cards were in use as of November 1, 2019. Correspondingly, debit cards continue to grow more popular, even with the competition from credit cards and the burgeoning use of mobile financial payments.

According to the U.S. Federal Reserve, debit cards “were used almost twice as often as credit cards in 2018, but the value of credit card payments exceeded the value of debit card payments by almost 30 percent.”

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With both credit cards and debit cards still widely used by financial consumers, what card works better for your spending needs?

Here’s where a little knowledge can make a big difference, before deciding which card gets the edge as the “go-to” for you.

Differences between credit cards and debit cards

Job one when learning about credit cards and debit cards is acknowledging their differences – and their relative “pros and cons.”

“Each may be cut out of similar plastic and lay next to each other in our wallets, but debit cards and credit cards serve very different functions,” said Nathan Grant, a credit industry analyst. “The pros and cons of each are very clearly defined though, so it makes it easier to identify when you should use one over the other.”

Here’s how Grant defines debit cards and credit cards:

Debit cards. These cards enable you to withdraw money directly from the cash balance in your bank account. “If you don’t have the money in your account, the card will be unusable, or depending on your bank’s overdraft policies, you can be charged a fee for spending beyond your actual account balance available,” Grant said.

Credit cards. These cards allow you to borrow money from credit card issuers that must be repaid. “Your starting credit limit that you can spend is determined when you first apply and is dependent on your credit history and your income,” Grant added.

Debit card “pros”

Structurally, debit cards act just like a digital check.

“The cardholder's funds are immediately pulled from a linked bank account and there are no interest charges,” said Robert Livingstone, president of IdealCost.com, a payment card service firm in Cooper City, Fla.

Here are the primary benefits of debit cards, according to Livingstone:

• Debit cards do not often require a hard credit check.
• The purchases are limited by the money in the linked bank account, which means there will never be any interest on purchases and there is less chance of financial peril.
• Debit cards often double as ATM cards to help when the cardholder is in need of immediate cash.

Credit card “pros”

Credit cards are basically defined as renewable lines of credit. “With credit cards, purchases can be made up to a predefined limit and some or all of the balance can be paid when the monthly bill arrives,” Livingstone said.

Here are the primary benefits of credit cards, according to Livingstone:

• Credit card usage helps the cardholder build credit, which will help with large purchases, like autos, new homes or home renovations.
• The cardholder typically has at least 30 days to pay for anything they have purchased. As long as you pay your bills on time, your credit health should remain robust and you won’t pay extra fees and charges.
• Many credit cards have rewards such as cashback, travel bonuses and other rewards.
• If a credit card is lost or stolen it is easy to dispute fraudulent purchases, often with 100 percent purchase protection.
• Credit cards may have associated perks that usually cost extra such as extended warranties and travel insurance.

Debit card “cons”

Debit cards fall short of credit cards in the following areas, Livingstone said:

• It may be harder to make larger purchases with debit cards.
• There are often little or no rewards for debit card purchases.
• Debit purchases don't contribute to building credit, which is an important element to getting better deals on credit and loans, especially for younger financial consumers.
• If a debit card is lost or stolen, disputing fraudulent purchases is much harder than a credit card.

Credit card “cons”

Correspondingly, credit cards may leave consumers wanting in the following spending areas, Livingstone noted:

• Credit cards often require a credit check so it's possible to be denied a card.
• With credit cards, it’s far too easy for cardholders to dig a financial hole that may take years to resolve.
• If a credit card is not paid in full each statement cycle, the overdue balance can be subject to annual interest rates as high as 30 percent.
• A credit card can't double as an ATM card if only cash is accepted at a particular business.

Debit or credit: Which card should you choose?

Like any personal financial tool, choosing to use a credit card or debit card – or opting to use a balance of both – is always based on your needs.

“It depends on your financial goals and attitudes towards cash,” said Edith Muthoni, an investment analyst at Learnbonds.com, an online investment and finance advisory platform in Las Vegas, Nev. “If you’re looking to embolden your credit score and know how to practice self-restraint even when you have access to a huge source of credit, you’ll want to apply for a credit card.”

“But if you’re a spendthrift with a perfect credit score already, avoid ruining it by restraining yourself to the use of a debit card.”