Debit Card vs. Credit Card: Which One Should You Use?

Perhaps the biggest difference between credit cards vs. debit cards is that credit cards can help to build your credit. The catch is that they come with the risk of falling into debt. Debit cards, on the other hand, don't build your credit but also don't put your finances at risk in the same way.

Credit cards also offer benefits such as rewards and/or cash back, while debit cards don't. Still, there are a few instances when reaching for a debit card makes better financial sense, especially if you're trying to pay off credit card debt.

Here, we look at each type of card's benefits and drawbacks to help you decide which is best for your spending needs.

Credit cards vs. debit cards

This table shows the differences between credit cards vs. debit cards:

If it seems like credit cards have more going for them than debit cards do, you're right. That said, your personal finances and goals are the biggest determinants of which card type you should use.

Pros of credit cards

The exact benefits and rewards vary, but many credit cards offer reward points, miles, or even cash back on your spending. There are also perks like airport lounge access, roadside assistance, and flexible installment plans. The risk of falling into debt, though, is a serious concern.

It's important to note that these benefits only apply if you're paying off your credit card regularly.

With that in mind, here are the major pros and cons of using credit cards:

Pros:

• Earns rewards points or miles: You can redeem these for cash back, hotels, flights, merchandise, charity donations, and more.
• Includes insurance: Possible types include travel insurance for trip delay or cancellation, mobile device coverage, and purchase protection.
• Annual travel credits: These are offered with premium travel credit cards and can sometimes offset a card's annual fee.
• Airport lounge access: Some travel cards include this perk, with a few offering free lounge membership and others just a few lounge passes.
• Travel perks: In addition to the ones mentioned above, other perks include free checked bags or companion vouchers, which offer a discounted ticket for someone flying with you.
• Roadside assistance: Credit card roadside assistance plans typically include services such as fuel delivery, flat tire repair, towing, and battery jump-starts.
• Provides flexible funding: They allow you to charge a big purchase and pay it back in small amounts over time, perhaps even with a specified installment plan.
• Improves your credit score: This only works if you make your payments on time and in full, but it can significantly impact your credit score.
• Makes it easy to purchase items: Most physical and online merchants around the world accept credit cards, so you don't need to worry about having cash on hand.
• Allows you to reserve a hotel room or book a rental car: Credit cards are usually required to hold reservations for hotels and rental cars, making them invaluable for travel.
• Works outside of Canada: Some cards even waive foreign transaction fees, so it's even easier to pay for purchases when travelling abroad.
• Fraud protection: Visa, Mastercard, and American Express all commit to protecting you against unauthorized transactions. Unless there was gross negligence, you can't be on the hook for more than $50, and you typically won't have to pay anything at all.

Cons:

• May have an annual fee: These annual fees can offset your earnings.
• Interest charges: Interest can significantly increase your debt if you fall behind on payments.
• May damage your credit score: If you miss payments or carry a high balance, your credit score can be significantly affected.
• Easy to overspend: It's very easy to overspend because credit cards are so widely accepted for almost any purchase, whether in person or online.
• Fees and high balances can spiral into debt: Especially if the card has a high interest rate or significant late fees, the debt spiral can quickly get out of control.
• Has high interest rates: Compared to other products, such as personal loans or lines of credit, credit card interest rates are very high.

Pros of debit cards

Debit cards don't carry the same risks of debt as credit cards, and they don't require annual fees. However, they also don't build your credit score and still charge overdraft fees.

Here are the main pros and cons of debit cards:

Pros:

• Prevents you from going into debt: Since you can't spend more than what's in your account, you can't fall into debt.
• Easy to apply for: Debit cards themselves don't need any application, but you can apply either online or in person to open the bank account they're associated with.
• No annual fees: You may pay a monthly fee for the bank account (though many accounts are free), but the debit card itself incurs no additional fees.
• Doesn't have credit score or income requirements: You must apply for the bank account it's linked with, but debit cards have no requirements at all.

Cons:

• Doesn't build your credit score: Since you're not borrowing any funds, your debit activity isn't reported to credit bureaus.
• Might charge you overdraft fees: Overdraft fees are charged if you spend more than what's in your account.
• You could be liable for unauthorized transactions: While debit cards are also typically protected against fraud, you could be liable if you don't take the necessary steps to protect your PIN. For example, don't use your birthday or keep a written record of your PIN with your card.
• Can't use them to finance large purchases: Debit cards don't have financing options. So, if you need to buy something expensive, you must already have the necessary funds in your account.
• Might have spending limits: Some accounts have daily spending limits for the associated debit card, which can be inconvenient when making a large purchase.

When to use a credit card vs. debit card

It's hard to overstate this, but there's no one-size-fits-all answer for which is better. Instead, it makes more sense to consider when a credit card or debit card is best for your personal finances.

For example, a credit card is an excellent option for people who have no problem making regular on-time payments and won't max out their card. A credit card might make sense if you plan to use it for everyday purchases to make them more convenient, or if you want to buy a large-ticket item.

Not only will you avoid having to carry cash and make change, but your everyday purchases can earn you valuable rewards. Those large-ticket items can earn even more rewards.

Travelling soon? If you pay for your flight, hotel, or rental car with a credit card that has trip insurance, you could have protection against lost baggage, delayed flights, or cancelled hotels. Plus, premium credit cards offer extra perks, such as reserved seating or concierge services.

You may wonder whether there are any instances in which a debit card is the better option. There are! If you're trying to pay down your existing debt, switching to a debit card is a game-changer.

Anyone who has struggled to pay off a credit card balance knows how difficult it is to make a payment, only to keep using it and watch the balance continue to climb. By switching to a debit card, you essentially freeze the amount of debt you have, so you can gradually chip away at it.

Debit cards are also a fantastic choice for people who are new to managing their finances. They're more convenient than carrying cash, and some debit cards earn interest on your balance or offer simple rewards. If you're not looking for complicated rewards programs and don't mind minor earnings, a debit card is a solid option.

FAQ

Which is better, a credit card or a debit card?

Credit cards have many advantages when used responsibly and paid off regularly. The right credit card can help you build a credit score, provide access to financing at a moment's notice, include valuable insurance coverage, and may even earn rewards for your purchases.

Is an ATM card a credit or debit card?

Technically, you can use both cards at ATMs. You can use your debit card to withdraw money from your bank account, but you could also use your credit card at the ATM to get a cash advance. Just be aware that this is an expensive way of accessing money.

What are 5 advantages of a debit card?

Debit cards offer a low-stakes way of learning how bank accounts and budgets work. They also help you stick to a budget, since you can't borrow from one. Debit cards are also much easier to qualify for and open. Plus, debit cards don't charge transaction fees, and using them instead of cash makes it easier to track spending.

What are the positives of credit cards over debit cards?

Credit cards help you build a good credit score. They also give you instant access to credit and the ability to earn rewards or cash back for the purchases you make. And, those purchases are protected against fraud, loss, or damage with your card's insurance coverage.

What's safer, a debit or credit card?

When it comes to debit vs. credit card security, credit cards are actually safer to use since there are more protections in place between you and your account. If your account is accessed, your liability is much lower than for a debit card that's used fraudulently.