When to Use a Credit Card Instead of a Debit Card

There are a lot of strong feelings out there against credit cards. Plenty of folks insist that if you use credit cards, EVER, you are on the road to financial ruin. No matter how disciplined you are. It is true that credit cards have long been connected to the idea of “easy money” and instant gratification. However, when used with discipline it is possible to use credit cards to your advantage. And, in some situations, it is better to use a credit card than to use a debit card.

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Credit Card vs. Debit Card

First of all, it is important to understand the difference between a credit card and a debit card. A credit card represents a loan. You are borrowing money. There is no guarantee that you have the entire amount you are charging on your credit card in a bank account right at this moment. If you pay off a credit card balance each month, though, it is an interest free loan. It’s when you start spending money you don’t have, and carrying a balance, that fees and interest start to add up, putting you into financial trouble.

A debit card is connected to your bank account. When you use this type of plastic, it takes the money directly from your account. In theory, if you don’t have money in your account, the transaction won’t go through. What you can spend is based on what you currently have, rather than a loan. While you can overdraw your funds, some measure of overdraft protection is required in order for that scenario to take place. Without overdraft protection, when you don’t have the money in your bank account, the transaction is rejected. Once you go over your funds using a debit card, even with overdraft protection, a hefty fee is charged.

When Using a Credit Card is Better

A debit card is a convenient way to access cash you already have, and for that reason, many prefer to use the debit card. However, there are some situations in which you might consider putting the debit card away and using a credit card instead:

  • Online purchases: If you use a debit card or some sort of cash alternative with online purchases, you are taking a risk, since it may be more difficult to get your money back if the product isn’t what you thought it would be. With credit cards, disputing with merchants is easier. On top of that, the fraud protection that comes built in with credit cards can provide security that is better than that offered by most debit cards.
  • Purchases that require large holds or deposits: When you travel, getting a hotel, buying gas and renting a car, the company will place a hold on your account. This is because there is no way of knowing ahead of time what the final bill will be. Hotels don’t know if you will order extra services when you check in, so they block off a large amount to cover it. The same is true at gas stations and at car rental places. A large hold can mean that your bank account is close to empty, and using a debit card for these transactions can mean the appearance of overdrawing your account and bouncing checks, resulting in fees. Use a credit card for these transactions, and save your debit card for other items.
  • Expensive items: Many credit cards offer warranty protection automatically with your purchase of some items. Additionally, you can dispute with merchants more easily. When you use a debit card or straight out cash, the money is gone from your account. Then you have to try and get it back from the merchant. When you use a credit card, though, that money isn’t gone from your account, and you have time to dispute.
  • You want better rewards: It is true that some debit cards now offer reward programs. However, the rewards offered by many credit cards are still better. If you want to rack up better rewards, you will have to use your credit card. Just make sure you pay the balance off each month, or your interest charges will destroy any value you get from the rewards.
  • You want to rebuild your credit: Debit card transactions aren’t reported to the major bureaus, and so can’t be used to build credit. If you want to build or rebuild your credit rating, a credit card works better. You can even get a secured credit card to help matters if you are concerned about things getting out of hand again.

Like most financial tools, the effectiveness of credit cards depends on how you use them. If you use them with planning and discipline, they can be useful. If you aren’t sure about them, though, you can use debit cards or cash, and you can use cash alternatives online.

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About the Author

By , on May 4, 2010
Miranda Marquit
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.

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Leave Your Comment (6 Comments)

  1. Pauline says:

    After today I’m using cash only except for bills. It takes 2-3 days for small items to clear and I get hit w/like $200 over draft fees when it’s assumed I have the funds to cover it and am told by the bank the amount has already been reduced from my balance which is HOGWASH. Just another way to suck money from consumers! Banks suck!

  2. Joel Gray says:

    Quite an interesting spin on the concept of credit cards. So, the truth is out, credit cards all be themselves are not bad it is dependent on how you use them. However, at the same time be careful and cognizant that having a credit card presents a real and active threat to the stability of your finances based on the ever present temptation.

    I am very much interested in financial tips especially as it relates to surviving in this economic climate. Please feel free to drop me a line.

  3. Zahid Lilani says:

    Using a debit is just not safe in some places. When you use your bank card as credit, you have to sign and that’s it. When you use the debit card, you enter the pin code which can be hacked by sophisticated instruments.

    Once someone has access to your pin code, all they need is the card from you and then you can imagine what can happen.

    It is always a good idea to use your bankcard as a credit instead of debit.

  4. Sarah says:

    This is an interesting take on the credit card issue. Most posts you see are along the lines of, “Oh no, please don’t ever use credit cards.”

    Perhaps if we started educating more people on the sensible use of credit cards, we’d have a lesser problem with credit card debt than we do right now. It’s human nature, after all, to do exactly as we’re told not to!!

  5. Stephan says:

    defintiely important for everyone to realize that credit cards are not your enemy, but the irresponsible use of them is. Ive had a credit card since i was 18, never missed a payment and always paid in full, and i use it strictly to get an interest free loan and keep my money until the last day its due. This way i earn some extra interest on the money in my bank and can avoid paying for my purchases for a certain amount of time.

  6. Brian says:

    I’ve seen this information in several places recently, about debit cards not protecting the buyer as well. I’m not sure this is still accurate. I know this used to be the case, but now most (several / at least my) banks have agreements with the credit card companies.

    I have two bank accounts with debit cards – one is backed by Visa and one is backed by Mastercard. I am unable to find any difference in the protection offered by using these cards and using the Visa card that is not a debit card.

    Granted, the money comes immediately (almost) out of my account, but that’s a different issue…

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