Credit Card vs. Debit Card: Which Is Better?

Next time you buy something you’ll probably pull a plastic card out of your wallet instead of a wad of cash. Depending on your preference, that plastic card might be a debit card or a credit card.

Both types allow you to buy things without physically paying in cash. Even though they look similar, there are some key differences between credit and debit cards.

Here's what you need to know about these two payment cards and when to reach for one over the other.

Overview: Credit Card vs. Debit Card

	Credit Card	Debit card
Funds source	A loan from the credit card issuer	Money from your checking account
Interest charged?	✅ The APR can be very high	❌ Since it's not a loan, no interest is charged
Builds credit history?	✅ Your activity is reported to the credit bureaus	❌ No actvity is reported to the bureaus
Earns rewards?	Sometimes — not all credit cards earn rewards, but many do	Some checking accounts offer rewards, but most don't
Protection against fraud?	✅ Includes protections against fraud and faulty purchases	FDIC-insured accounts are protected if the bank fails, but this doesn't cover if your debit card is stolen

What Is a Credit Card?

A credit card is basically a mini ongoing loan between you and a credit card issuer. You can spend up to your credit limit regardless of whether you have the cash in your bank account to cover the cost of your purchase.

At the end of the monthly billing cycle, you'll receive a statement showing your total balance owed. While you don’t have to pay the balance in full, you will be required to make a minimum payment each month to remain in good standing.

If you don't pay in full, you'll carry a balance to the next month and be charged interest. Letting the balance grow will lead to more interest accruing, taking you longer to pay it off.

Your credit card activity is reported to the major credit reporting agencies (Equifax, Experian, and TransUnion). How long the account has been open, the balance you carry, and whether you make on-time payments will affect your credit score.

RELATED: How Do Credit Cards Work?

What Is a Debit Card?

A debit card is linked to a checking account. Every time you make a purchase, the amount is deducted from the money you have in your account.

While debit cards don’t charge interest, you can be charged overdraft fees if you try to make purchases or withdraw more than the amount of money you have.

Sometimes a purchase made with a debit card is rejected if there are insufficient funds to cover it. Some banks offer overdraft protection by connecting a savings account to your checking account and transferring funds to cover the purchase.

Credit Card vs. Debit Card: Main Differences

Credit and debit cards are both plastic cards that you can swipe at checkout to purchase things. But they have key differences.

Where the money comes from

Debit cards are tied to your bank account and only give you access to the amount of money that’s in your account. If you have $1,000, for example, you can only use your debit card to make $1,000 worth of purchases.

A credit card isn’t connected to your bank account. It allows you to purchase things up to your available credit amount, regardless of whether you have the money.

For example, if you have $1,000 in your checking account but have a credit card with a $2,000 credit limit, you can use your credit card to make up to $2,000 worth of purchases (although using that much of your available credit can damage your credit score).

How much you (might) pay in interest

A credit card is essentially a mini loan. You borrow money and then pay a credit card bill at the end of your monthly billing cycle. If you don't pay the balance in full, you'll be charged interest.

Credit card interest can add up quickly, and keeping a running balance can lead you into credit card debt.

Since debit cards aren't loans, you aren't charged interest.

RELATED: Why It’s Hard to Get Out of Debt With Only Minimum Payments

Building a credit history (or not)

The credit bureaus receive reports about your credit card use, influencing your credit score. When you're responsible with your card, you'll build a positive credit history.

But if you take on too much debt, your score will drop, and it'll be harder to access other types of loans, like a car loan or a mortgage.

Debit card use is not reported to the credit bureaus. It's simply a way to access the money you already have in your bank account. While using a debit card can help you stay out of debt, it won’t help you build credit.

Whether you earn rewards

Many credit cards offer rewards like cashback on your regular purchases or points you can use for travel.

Some banks may offer rewards for using a debit card, but most don’t.

How protected your money is

A credit card, not linked to your checking account, provides an additional layer of protection between you and your money.

If someone steals your card, your credit card provides consumer protections that debit cards typically don't.

When To Use a Credit Card

Here's when it's best to use a credit card:

• If you're making a reservation. There may be certain circumstances where using credit is required, such as booking a hotel room or a rental car.

• If you're making an expensive purchase. Since debit cards have daily spending limits, if you want to make a purchase that exceeds your debit card’s daily limit, it might be better to use a credit card instead.

• If you want to earn rewards or cashback. If you are planning a big trip, using a credit card to rack up travel points on your everyday spending can be a great way to reduce the cost of your trip. Or you could save money on your gas or groceries with a cashback card (provided you pay it off every month!).

• If you want to build credit. Credit card companies report your account activity to the credit bureaus. A good credit score can give you access to better loan terms, especially if you’re trying to make a big purchase like buying a house.

• If you want financial protection. Credit cards allow you to purchase things without providing a direct line to your bank account. This means fraudsters are unable to clean out whatever’s in your bank account if they get hold of your card.

When To Use a Debit Card

Here's when it's best to use a debit card:

• If you’re in debt or concerned about getting into debt. Debit cards allow you to spend money you have, rather than spend money you don’t.

• If you want access to cash. You can use your debit card at an ATM or ask for cash back the next time you check out at the grocery store. (You could do this with a credit card, too, but you'll be charged very high fees.)

FAQs

TL;DR: Credit vs. Debit: Which To Use When

Credit cards offer better fraud protection, rewards, and help build your credit score — but they also tempt you to spend money you don't have.

Debit cards keep you within your budget since you can only spend what's actually in your account, but they don't build credit or offer the same consumer protections.

Use credit cards for big purchases, travel bookings, online shopping, and when you want to earn rewards. Just make sure you pay the balance in full each month to avoid interest charges.

Stick with debit cards if you're working on debt, want to avoid overspending, or need cash from an ATM.