Managing your finances with debit and credit cards.

Mel Barnes, SVP – Chief Operations Officer

There are many differences between a credit and a debit card, and there are many reasons for using one versus another.

A debit card is essentially a plastic check. When you make a purchase, the money comes directly out of your bank account. It also works as an ATM card, so you can take cash directly out of your bank account—but no more than you have in your account. When you make a purchase with a debit card, you won’t get a bill and you won’t pay interest, but you may face overdraft fees if you spend more than is in your account.

A credit card, on the other hand, is like a loan that offers a maximum amount you can borrow. This “credit limit” is based on your credit history and income. Each month, you’ll get a bill for the amount you spent. If you only make the minimum payment, you’ll be charged interest on whatever amount remains. 

Benefits of using a debit card:

You only spend what you have. Unlike credit cards, your balance of available funds shrinks every time you use the debit card, so you can avoid spending more than you have.

Budgeting. If you use a debit card for all your purchases, you can examine your statements and get a better idea of where you’re spending money. 

Instant information. Some banks that issue debit cards offer the option of receiving text messages with account updates and alerts if there’s a purchase over a specific amount, which can possibly indicate fraud.

Benefits of using a credit card:

Better rewards. Credit card issuers can be more generous with credit rewards because they make more money from credit cards, thanks to the interest people pay on debt. Financial institutions make a lot less money from debit cards. Rewards can include:
  • Cash back: Some cards offer up to 5% cash back for each purchase, which is like getting a small discount on everything you buy.
  • Points or miles: You can earn points or miles on every purchase you make, and then redeem them for flights, hotel stays, or statement credits.
  • Bonuses: Some cards come with a sign-up bonus in the form of cash (like a $200 statement credit) or extra points (like 50,000 bonus points). 

Helps you build positive credit history. Using your credit cards responsibly—faithfully making at least the minimum payment on time—will help you build a solid credit history and improve your credit scores. Debit cards have no effect on your credit history.

Provide more flexibility when traveling. Many hotels, gas stations, and rental car companies place “holds” on debit cards until the actual amount of money in your account can be determined. Credit cards don’t have the same problem with retailers.


Whether you’re a victim of credit card fraud or debit card identity theft, federal law dictates your level of liability. The Fair Credit Billing Act (FCBA) caps the liability of credit card users at $50. As long as you notice the fraudulent charge on your account, you can call the card company, file a dispute and not be liable for the charge(s). This limited liability is one of the main reasons experts recommend using credit cards, especially for online purchases. 

Debit card fraud protection is covered by the Electronic Funds Transfer Act (EFTA), and protection varies. If your debit card is stolen or somehow compromised, the money the thief spends comes straight out of your account—often long before you know there’s a problem. As long as you notice the theft within 48 hours, the most it can cost you is $50. If you don’t notice if for 60 days, the maximum loss is $500. After that, there’s no limit; you could potentially lose everything in your account.

Tips from the experts.

Here are some other tips from financial experts that will help you decide when to use your debit card or credit card.

  • When a retail clerk asks you, “Credit or debit?”, say “credit” even if you’re using a debit card. Why? Credit and debit cards use different networks to process your transaction. If you say “credit,” your transaction is transmitted over Visa’s or MasterCard’s network, which will protect and secure your purchases just like a credit card.
  • Use a credit card at unfamiliar retailers, particularly those in a foreign country or online. Disputing credit-card purchases is easier and potentially less detrimental to your finances than a debit-card dispute.
  • Avoid using your debit card at the gas station, which can put a hold on part of your money for several days.

The main benefit of debit cards is they make it more difficult to spend money you don’t have. If you won’t be responsible with a credit card, a debit card is undoubtedly a smarter choice. But properly managed credit cards can produce many positive financial benefits, including rewards, credit building and liability protection.


Sources: Credit Card Insider and Wall Street Journal

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