They’re both plastic cards with a magnetic strip, raised numbers and expiration dates, and they fit neatly into your wallet. But debit and credit cards aren’t identical. While there are tons of advantages to using plastic over cash, understanding the difference between debit and credit cards can help you make smarter spending decisions.
“When trying to decide which card to use, it really all comes down to how you use it,” says Mikel Van Cleve, advice director for USAA.
When to Use a Credit Card
Wait! Before checking out the list below, know the most important rule of all when using a credit card: never charge more than the amount of cash in your bank account. “Don’t charge more than you can afford if you can’t turn around and pay it off in full,” Van Cleve says. If you fail to pay your balance in full each month, interest builds up on top of your owed charges — and within a few of months, you may wind up paying a total of $100 for that $80 pair of shoes you charged on the card.
You can’t build wealth if you’re constantly in debt to a credit card company!
Protection When Shopping Online
One of the main benefits of credit card use is the protection it offers. If an item never arrives or shows up on your doorstep damaged, you can ask the credit card company to dispute the charge so you aren’t responsible for the charge, before money ever leaves your bank account. USAA has a zero-liability policy so you aren’t held liable for anything up to $50 in charges — the standard for most other credit card companies.
Protection at the Gas Station
Just like online shopping, if a hacker’s skimmer at a gas pump swipes your card information and you’re hit with fraudulent charges, the credit card company will remove them before the money ever leaves your bank account.
Building a Credit History
Will you need to apply for a loan for a new house or a car in the near future? News flash: You’re likely going to need a good credit score to qualify and win that kind of loan. Your history of credit card usage and whether you’ve been using it responsibly – on-time payments, never maxing it out, etc. – will play a part in determining if you get the loan or not. Lenders like to see a history of on-time payments and small (or no) balances on the card, and some lenders flat-out won’t issue loans or lines of credit if you have a series of late or missed payments or a high balance.
Here’s another point to note: Some lenders won’t issue credit if you have no credit. As in, if you’ve never used a credit card or had a financed loan in your life, they’re not willing to be your first. Some banks offer a secured credit card that can help you build a good credit history. And if you’re thinking, Well, I use my debit card all the time! Doesn’t that go toward my credit history? The answer, simply, is no!
This is probably the most important difference between credit and debit cards: debit card usage does nothing for your credit.
Protection When You Rent a Car
When it comes to rental cars, some credit cards offer collision damage insurance, so you can avoid paying for the add-on coverage that rental agencies sell.
Rack Up Credit Card Rewards
Many credit card reward programs allow you to rack up points on stuff you’re already buying, which can lead to big-time benefits — from airline tickets to cash back. Some cards even offer warranty protection beyond the manufacturer or store’s coverage (review the specifics of your agreement). Look for no-fee cards and pay off balances each month to avoid interest charges. Otherwise, those “free” rewards could end up costing you more than you originally planned.
The Downside of Using a Credit Card
Even with all of the benefits outlined above, use your credit card with caution by being honest about your spending habits. “There are behavioral reasons not to use a credit card, since many people have a tendency to spend more just to get more rewards, for instance, or may spend more because they don’t feel the immediate pain of cash coming out of their account,” Van Cleve says.
When to Use Debit
Learn to Budget
Debit cards allow users to practice budgeting money before borrowing money on a credit card. Because every time you use a debit card, money leaves your bank account, it’s easier to see in real time how daily purchases drain your cash.
Avoid Paying Interest
The interest that credit cards charge for carrying a balance can add up quickly. If you don’t trust that you’ll pay the balance each month, using a debit card can eliminate that risk.
The Downside of Using a Debit Card
In our daily lives, we’re typically not thinking about or looking at our checking account balance, and most of us aren’t doing mental math on a consistent basis. So when we buy a salad and sandwich for lunch or that afternoon cup of coffee, we’re often doing so without a second thought. After all, swiping a plastic card feels less painful than forking over cash, which makes your wallet noticeably lighter.
Debit cards also offer less protection against fraud. Once thieves drain your bank account, the money is gone. After filing fraud complaints, most banks will work with you to restore your funds and identity, but you’ll still have financial needs in the meantime, such as paying bills and buying food. Ironically, this could cause you to turn to credit cards to cover the shortage until payday!
Remember that handy perk about using credit cards for rental cars? Well, if you use your debit card for the security deposit on the rental cars, or even a hotel reservation, it could put a sizable temporary hold on your funds and stall access to your cash.
When You Know Better, You Do Better
The differences between credit cards and debit cards are surprisingly vast, given how similar the cards look. And while knowing what cards work best for your spending habits is critical, your daily behavior is ultimately what has the most impact.
“We form certain habits, and when they’re money-related, they can lead us down a good path or [a] bad path,” Van Cleve says, adding that whether you’re financially savvy or not, behaviors are a part of your life. “To me, the behavioral side is so much more important than dollars and cents. We’re all wired on the behavioral side, but we’re not all wired when it comes to numbers.”
Check out our free online calculators and planners to help you create a free, personalized financial picture and spending budget that encompasses all of your credit cards, investments and bank accounts.
About the Professional: Mikel Van Cleve is a CERTIFIED FINANCIAL PLANNER™ professional and advice director for USAA. Mikel has 14 years of experience in the financial services industry, and his advice has appeared in numerous outlets, including The Wall Street Journal, the Associated Press, CNBC.com and Business Insider. He writes personal finance blogs for USAA Community and participates in the USAA Money Drill podcasts. Prior to entering the financial services industry, he served in the Coast Guard.
This credit card program is issued by USAA Savings Bank, Member FDIC.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
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