When its Best to Use a Credit Card vs a Debit Card

aaron_image1Have you ever considered when might be a good time to pay with credit vs with a debit card?

While not big proponents of using credit cards – especially when you are just starting out or have poor money management skills – there are times when it makes sense to use credit vs paying with a debit card (which takes money right out of your bank account).

When it comes to using credit cards – it's always best to be on top of your balance and be paying it off every month. When I was just out of college – my first big money mistake was carrying a lot of credit card debt. There's nothing worse than paying interest rates on unsecured debt. If you do have a lot of debt – one thing you can do be on the lookout for interest free credit cards and transfer the balances to avoid monthly interest rates. A word of caution: those balances will likely balloon after a period of time and you'll be stuck with a super high interest rate. I did this for awhile when I was getting myself out of  debt (transferring from one zero interest account to another) – but it is not something you want to practice, long-term. Also, note there may be fees associated with transferring balances. 

Generally, my wife and I use only cash and debit cards to pay for things. This works well for us because everything is coming out of one account and I don't have to be tracking or managing other accounts. But sometimes – it just makes sense to pay with credit card.

Here's a few guidelines to consider when deciding on whether to use credit or debit:

Will the purchase exceed the spending limit?

Many debit cards have a daily spending limit which you cannot exceed. If you are contemplating a larger purchase – and have a higher limit on your credit card vs your debit card – it's a good time to pay with credit.

You want to take advantage of the rewards

I will generally use my credit card to maximize a reward. In the case of my Discover card – they have monthly reward programs for using your card for a certain category. Often I will use the card when I want to take advantage of those rewards.

Greater protection

As many of us already know, when using a debit card, the cash is immediately taken out of our bank account. Such is not the case with the credit card. This offers a user greater protection against unauthorized use and can give you better recourse for disputing an unwanted charge.

Helps to build credit history

If you are attempting to build or re-build your credit score, using a credit card will count towards this goal. So by making your monthly payments on-time and consistently, you'll improve your score.

Making a larger purchase?

I will often place larger purchases on my credit card than I would with a debit card. There are a couple reasons for this:

  1. I like that I will get more rewards with the purchase going through the credit card
  2. Being it is a larger purchase, I sometimes like the ability to pay for it over a period of time and prefer not to draw down my bank account balance
  3. Some credit cards, like the Costco American Express card will double the warranty on an item purchased with it

Are there other benefits you see to using a credit card vs. paying with debit?

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  1. I have started to use my credit card for almost every purchase. It gives me the rewards for stuff I was already going to purchase, plus I get the security of a credit card. I pay off the balance, so I get to reap the rewards. If you don’t, then the point is moot.

    • @Grayson – I’d be interested to hear how you pay everything w/ cc and how you navigate your bills/budgeting
      @John – I’m with you on the larger purchases too

  2. We use a mix of paying by cash and using our credit card. We like to use credit cards for the larger purchases for the better protection as well as to earn the rewards. We pay off our two main cards each month so it works out well for us.

  3. If I can’t pay off the amount of the credit card purchase by the end of the month without dipping into my emergency funds, then I take it as a sign that I shouldn’t be buying it :)

    But I’m certainly in a different place with debt than other folks are (see my blog for details if you want). Some more points:

    “You want to take advantage of the rewards.” Not a bad idea if you don’t let the rewards trick you into spending more. Make sure you know the rewards percentage you get too; some cards have revolving categories.

    “Helps to build credit history.” It’s having the credit line open that builds history; not necessarily using it. If this is your goal, just use it once a year so it doesn’t get closed for inactivity.

    “Making a larger purchase?” These aren’t bad reasons, though see the first line of my response again :) I’ve also found that sellers who accept credit card for big purchases — esp. cars or furniture — are willing to negotiate with you if you offer to pay cash to avoid fees, so make sure you ask that question.

  4. @pfinMario: The first point you made about rewards is a big one. My wife and I use a credit card for everything and pay it off at the end of the month. It’s really easy for us to say we’re not spending more with a credit card than we would with a debit card or cash. But if we were being really honest, there were probably a handful of times in which that wasn’t true (particularly at the grocery store). That said, I believe it still makes financial sense for us, even if we do spend a bit more than planned every once in a while.

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