Deciding whether to swipe your debit or credit card at checkout should be about more than which card happens to be at the front of your wallet.
While both plastic payment options are quick, convenient alternatives to paying in cash, choosing whether to pay with debit or credit could impact your credit scores—and possibly the cash in your bank account.
“Whether you pay now or pay later, both have their pros and cons,” says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. “Credit cards are valuable financial aids when used properly. However, using a debit card does not involve the extra expense that comes with using a credit card.”
To help you decide which card to use when making your next purchase, consider the following credit and debit card benefits and risks.
- Credit card benefits
Building credit: If you are making a large purchase, a credit card is a fast way to borrow money now that you will pay back later. Most credit card activity is reported to the three national credit reporting agencies, so any positive behavior, such as making on-time payments, can help you build a good credit history and credit scores. Debit card activity, on the other hand, is generally not reported to the credit reporting agencies, so paying with a debit card will not help you build a credit history.
Grace period: With most credit cards, you are given a grace period before you have to pay back your debt. If you pay your bill in full before the grace period has expired, you avoid paying interest charges.
Fraud protection: In the case of fraud, your liability for the unauthorized use of your credit card tops out at $50, according to the Fair Credit Billing Act. If you report the loss of your card before it’s used, though, you are not responsible for any charges you didn’t authorize.
Rewards: Many credit cards offer rewards, ranging from cash back to discount points for certain products.
- Debit card benefits
Limited costs: By paying with a debit card, you avoid some of the credit card-related costs, such as annual fees and interest charges.
Cash back: You can take cash out of your bank account with your debit card by withdrawing money from an ATM or when making a purchase at some retail stores.
Safety: You can save yourself some risk by carrying a debit card instead of large amounts of cash that could potentially be lost or stolen.
- Credit card risks
Fees and interest: If you don’t pay your credit card balance in full each month or your card doesn’t have a grace period, you will be charged interest. This can be particularly costly if you pay only or near the minimum amount due each month. In addition, if you’re late paying your bill or you go over your credit limit, you could be hit with fees.
Overspending: Because of high credit card limits and rewards, there is a tendency to overspend when using a credit card versus a debit card, Jones says.
- Debit card risks
No credit building: Debit card use is not reported to the three national credit reporting agencies and therefore does not impact your credit scores directly, Jones says.
Overdraft fees: While you don’t have to worry about paying interest on a debit card, banks often charge hefty overdraft fees if you make a purchase with insufficient funds in your account.
Fraud liabilities: Debit cards with a personal identification number (PIN) offer an additional level of protection from fraud, and if you report a lost or stolen debit card before anyone else uses it, you’re not responsible for any unauthorized transactions.
However, you are liable for unauthorized charges if your debit card was used before you report it missing or stolen, and your liability depends on how quickly you report it. You could be liable for up to $50 if you report the card missing within two business days of learning about the loss or theft, $500 if reported between three and 60 days, and all money if your missing card goes unreported for more than 60 days after your statement is sent to you.
Weighing the pros and cons
Debit cards may be most useful for small purchases and for paying routine bills, according to the Federal Deposit Insurance Corporation. Charging to a credit card, on the other hand, may be a good payment option when you need to make a necessary purchase but your bank account balance is low, or if you are trying to establish or build your credit history. A credit card may also be the way to go if you are shopping online, as debit cards have limited protection in the case of fraudulent transactions or disputes.