Is It Smarter to Use a Debit Card or Credit Card?

Although they may look exactly alike tucked away inside of your wallet, credit cards and debit cards represent two very different types of payment methods.

Using a debit card is similar to paying with cash or an old fashioned paper check. A debit card (which is also different from a prepaid debit card) is tied to your bank account, and when you make a purchase, the funds are withdrawn from your available balance.

Credit cards, on the other hand, operate quite differently. When you use a credit card to make a purchase, you’re essentially taking out a loan from your credit card issuer which you’ll later be required to pay back. That loan is drawn from a predetermined amount, formally called your credit limit. It may be paid back, and then drawn again. This can occur over and over for as many years as you want to use the card.

Like all financial products, there are pros and cons associated with both debit and credit cards. If you already have some preconceived notions of which type of plastic is best, try to set those aside for a moment and take a look at the benefits and drawbacks each payment method has to offer.

Fraud Protection

Credit card and debit card fraud is, unfortunately, quite common. No one is immune. I’ve been the victim of credit card fraud too many times to count. The chances are pretty decent that you have already dealt with unauthorized charges at some point, perhaps multiple times. Thankfully, when your credit card information is compromised or stolen, you’re very well protected from a financial standpoint.

The Fair Credit Billing Act (FCBA) is the federal law that protects you in the event you experience credit card theft or fraud. Per the FCBA, if you report unauthorized charges to your card issuer within 60 days, your liability for fraudulent transactions is capped at $50.

On top of the FCBA protections, all four of the major credit card networks (Visa, MasterCard, American Express, and Discover) have a zero liability fraud policy. In truth, you will probably never pay a cent if you report credit card fraud promptly. And, the money that has been stolen or “used” without your permission isn’t really your money — it’s the card issuer’s money.

It’s worth noting that the Electronic Funds Transfer Act (EFTA) protects you from unauthorized debit card transactions as well. However, the EFTA’s protections are less robust.

For example, under the EFTA, your liability for unauthorized transactions climbs to $500 instead of $50 if you wait more than two business days to report the fraud. Also, unlike credit card fraud, when unauthorized debit transactions occur, it is your money that’s been stolen. This could lead to a host of other problems if, for example, you don’t have access to the funds that should be in your bank account when rent, bills, or other financial obligations become due.

Related: Eight Hidden Benefits of Credit Cards

Credit Building

Another benefit of opening and using a credit card responsibly is the fact that doing so has the potential to help you build stronger credit. Keep your credit card balances low, and preferably paid off in full each month, and make every single payment on time. You’re likely see those accounts have a positive impact on your credit scores over time.

Related: How to Raise Your Credit Score

Curbing Overspending

The primary advantage that people associate with using debit cards over credit cards is the fact that debit cards discourage overspending, or even render it impossible. You might not be a great money manager, but if you opt to use a debit card, at least you won’t be going into debt.

Meanwhile, some 29 million Americans have carried a credit card balance for two years or more, indicating that they’re chronically spending more than they can afford to.

Yet the truth is that if you have an overspending problem, a debit card will not actually fix it. It will merely constrain your spending to the balance in your checking account. On the other hand, you could open a credit card account with an intentionally low limit and perhaps accomplish the same goal while still enjoying better fraud protections.

More by John Ulzheimer:

John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

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