When To Use a Credit Card vs. Debit Card

Layla Bird / Getty Images

Layla Bird / Getty Images

Both debit and credit cards allow you to shop online and buy in person without using cash. They are both the same size and shape, both have 15 or 16 digit card numbers, and both may have the same logo from a service provider such as Visa or Mastercard. You’re from one, half a dozen from the other, right? Not even close.

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“While debit and credit cards may look the same, they are very different financial tools,” said Laura Adams, MBA, personal finance expert with Finder.com. “A credit card allows you to make purchases using borrowed money that you have to repay with interest over time. A debit card allows you to make purchases using your money in a linked bank account. “

Responsible use of your credit card can earn you points, miles, cashbacks and other valuable rewards. They also help you build your credit and impress prospective lenders, which makes credit cards the right choice in many cases. Many, but not all. According to experts, the following scenarios specifically require one or the other.

Credit card: for small recurring expenses

If you have some cards you no longer use but don’t want to lose the open credit they provide, you can keep them in good standing by using them to pay for small recurring bills, like streaming subscriptions.

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“These services don’t cost much and ensure that your credit remains open and active, which can help boost your credit score, as long as you make timely payments,” said Tom Koesternen, financial analyst (CFA) and consultant. for The Guaranteed Loans.

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Debit Card: For purchases that offer a cash discount

Some merchants will refund you for allowing them to avoid the fees that come with processing a credit card transaction.

“Sometimes, paying with a debit card or cash can earn you a discounted price,” said Freddie Huynh, vice president of data optimization with Freedom Debt Relief. “This is seen more often in the case of large items.”

It’s not just the expensive things. Some daily purchases, like filling up at a gas station, also offer cash discounts that you can earn with a debit card. In other cases, the stores will reward you for giving up credit cards. Target, for example, offers a 5% discount for linking your checking account to its RedCard debit card.

Credit card: to finance large purchases

It’s never a good idea to use a credit card to make purchases you can’t afford, but if you need to stretch out a large payment card, the strategic use of plastic can get you there.

“If you need to finance a large purchase that takes time to pay off, a credit card is a good option,” said Lauren Davis, founder of the Moolah Project.

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But don’t throw that grand piano on a card with a 24% APR. Davis recommends this strategy only with cards that offer a 0% interest introductory period so you can fund your purchase for free.

Debit Card: When you’re trying to hold back ln

If credit cards have allowed irresponsible spending, there’s nothing like watching your bank balance shrink with each purchase to keep you in check.

“Because debit cards are linked directly to your checking account, it’s harder to overspend and get into debt,” said Lucas Solomon, corporate and personal financial advisor and founder of FX4Biz. “If you’re trying to avoid using credit cards or getting into debt, using a debit card can help you stay on track.”

Credit Card: Whenever a deposit is required

Some transactions require an advance deposit if the final invoice is uncertain at the time of purchase. In some cases, like renting a car or hotel room, a credit card is required. But even if the merchant accepts a debit card, credit is usually a safer alternative.

“When you have to pay a deposit for goods or services, such as equipment rental or travel reservations, using a credit card allows you to dispute a charge and get your money back if necessary,” Adams said.

Debit card: to withdraw cash

When you use your credit card for an ATM cash advance instead of your debit card, you are not withdrawing money – you are financing a very expensive short-term loan. Not only do cash advances typically come with higher APRs, but they don’t qualify as introductory APR purchases and can trigger interest to start accruing on balance transfers.

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Cash advances should be a last resort for only the most serious emergencies.

“If you use your credit card to withdraw cash, the fees charged are not only high, but it’s also not a good move from a credit score standpoint,” said Damian Serwin, budget expert and co-founder of Why Budgeting. “Lenders look at this as you can’t plan your money right.”

Credit card: online shopping

There are very few situations where it makes sense to use a debit card for e-commerce. In the case of online fraud, which is a very real risk, it is much easier to convince a credit card company to cancel a purchase than to convince a bank to refund the stolen money.

“Having your debit card information on the Internet is risky, making credit cards a better option when shopping online,” Koesternen said. “Although debit cards are chip-enabled and help deter in-person fraud, the chip isn’t very effective at protecting you online. So, avoid saving your debit card details online or choosing it as your preferred payment method. “

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This article originally appeared on GOBankingRates.com: Experts: When to Use a Credit Card Versus a Debit Card

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