Debit or Credit? When and How to Use Each Card

College is an interesting transition period where your payment methods change and your level of financial accountability rises. For a long time now, you’ve likely owned and used a debit card, but college is often the period at which you begin using a credit card. This new available method of purchase raises a pertinent question: which type of card should I use when making purchases? In an attempt to answer this question, differences between the two types of card will be compared in three categories: debt, security, and rewards.

Debit cards do not involve debt in any way, and credit card payments are based entirely around debt. These two setups each have their own pros and cons. For debit cards, consumers don’t have to worry that they are borrowing more than they have, and they do not have the potential of fees and interest for paying late.

Credit cards do include these potential consequences if they are not responsibly used. However, if responsibly used, credit cards have the potential to positively affect a consumer’s credit score. Debit cards don’t tend to affect one’s credit score, so while consumers cannot negatively their scores by using a debit card, they also cannot improve their scores in any way by using it. To paraphrase what I stated in a previous Financial Friday, credit cards are a useful way of improving one’s credit score, and it’s one of the main benefits of using a credit card, especially early on in one’s credit history. Now for the security implications of credit and debit cards.

Generally, credit cards are considered more protected against fraud and identity theft than debit cards. Per the Federal Trade Commission, credit and debit cards are protected from theft by the Fair Credit Billing Act and Electronic Funds Transfer Act, respectively, but credit cards enjoy stronger legal protection. If a credit card is stolen, the consumer’s maximum liability is $50, as long as he or she reports it in a timely manner. The liability for a stolen debit card is much larger and more constrained by time. Debit card holders have the same $50 maximum liability but only if he or she reports the theft within 48 hours of its occurrence. Between three and 60 days, that liability increases to $500. After 60 days, liability is unlimited. Fraud protection can vary by debit card provider, but at least from a legal perspective, it’s tough to argue that a debit card provides better protection from fraud. It’s also tough to argue that a debit card offers better rewards.

I’m not going to tell you that only credit cards offer rewards, but I will say that credit cards are more commonly known for offering them than debit cards are. I also won’t say that all credit cards offer rewards, but I will say that credit cards usually offer rewards of some sort. Some of the most common credit card rewards include cashback, gas perks, points for catalog shopping, hotel points, and airline miles.

You might be thinking, “Hey I get cash back with my debit card at my two favorite Oakland Rite Aid’s all the time!” You can get cash back with a debit card, but it’s not the same type. Debit card cash back is basically paying more to access cash without the inconvenience of going to the bank or gracing Towers Lobby with your presence. Credit card cashback programs refund a certain amount of your total purchases on your card, either in general or for specific categories of purchases. For example, a credit card might offer 5% cashback on groceries, which basically equates to receiving a refund on 5% of your grocery store purchases. Regardless of which perk you seek, using a credit card and paying it off responsibly can lead to financial rewards you would otherwise not receive.

So, now that we’ve compared some of the main differences between using a debit and credit card, which one should you use? Probably both. These two forms of payment both have their own pros and cons, and you should utilize them in an optimal way the maximizes the pros and minimizes the cons of both. What mix is optimal likely depends on your level of control and responsibility in handling your finances.

If you don’t buy more than you can pay for, and consistently pay your bills on time, there’s a good chance you’ll benefit from utilizing your credit card frequently, as you’ll likely reap rewards and improve your credit score. If you’re less responsible with your purchases and or bill payment, it’s likely a good move for you to rely on your credit card a little less often so as not to put yourself in a whole and adversely affect your score. That all being said, a mix of both is still probably best regardless of your situation.

You need to somehow establish credit in the credit-driven society we live in, and using a credit card is a common way to improve your score. Alternatively you don’t want to overuse credit, as it could lead to a high or suboptimal credit utilization ratio, which is the amount of your available credit that you use. 30% is generally considered an optimal ratio to keep, which means you’ll likely need to use your debit card for some purchases to keep you ratio down.

Debit and credit cards are markedly different forms of payment and they should never be thought of interchangeably. That being said, some mix of both is commonly the best answer in regards to which card to use. Living in absolutes is rarely a highly recommended strategy, and the case is no different with methods of payment.