Debit vs. Credit: Pros, Cons, and When To Use Each

Debit and credit cards are both convenient payment methods, but there are distinct differences between them. For one thing, the average credit card rate was 21.47% as of November 2024, whereas debit cards don't have an associated interest rate.

Not only do they come with different costs, but their impact on your budget, credit, and financial health can vary quite a bit, too.

“Debit and credit cards seem identical,” says Matthew Argyle, a certified financial planner (CFP) and founder of Encore Retirement Planning. “Both swipe, tap, or insert at checkout, but their functions couldn't be more different.”

Here's what you need to know to ensure you're choosing the right type of plastic the next time you buy something.

What's the difference between a debit card and a credit card?

As Argyle notes, debit and credit cards are vastly different. One major difference is where the payment funds come from. With a debit card, your money is pulled from a connected bank account, and you can only use as much as the bank account holds. If you try to use the card for more than that, you could face overdraft charges from your bank.

Credit cards, on the other hand, are borrowed funds. You're allowed to use the card up to a certain dollar limit, which the card issuer based on factors like your credit, payment history, and income.

Once you spend some of your credit line, you must either pay off the balance or make minimum payments to the card company every month until it's paid off. If you do carry an outstanding balance, you must pay interest on it.

“The key difference between debit and credit is with one, you're using your own money in the bank and the other, you're using someone else's that must be paid back in a timely fashion,” says Michael Primavera, a ​​retirement planning adviser at Daniel A. White & Associates in Lewes, Delaware.

Pros and cons of using a debit card

The biggest benefit of using a debit card is that it's your own money, so there are no interest charges and no cycle of debt to fall into.

“A debit card is like a disciplined financial coach, keeping you in check by drawing money directly from your bank account,” Argyle says. “No borrowing, no debt — just spending what you actually have.”

Debit cards can also be beneficial for budgeting and cash flow purposes, ensuring you never spend more than you currently have in the bank.

On the downside, though, debit cards won't help you build credit, and they come with limited fraud protection compared to credit cards.

“Fraud risk is always my main concern between debit and credit cards,” says Stephan Shipe, a certified financial planner (CFP) and founder of Scholar Financial Advising. “If someone fraudulently uses your debit card, that money is immediately gone, and it may take some time for the bank to review the transaction and get your money back. A fraudulent credit card transaction can be reversed quickly.”

One last drawback to debit cards is that they can't really be used as a financial safety net if you need to cover a large charge in a pinch. Unlike credit cards, they're limited to the funds you have in the bank.

Pros and cons of using a credit card

As Shipe notes, credit cards come with excellent fraud protection, and if your card is stolen or someone has charged items without your consent, you can typically have those charges reversed quickly.

“By law, a credit card company cannot stick you with fraudulent charges, but a bank can drag out the reimbursement process,” says Lamar Brabham, founder and CEO of Noel Taylor Agency Financial Services in North Myrtle Beach, South Carolina.

Credit cards also often have big reward-earning capabilities. They might allow you to earn cash back, airline miles, travel credits, and more, and they sometimes come with perks that debit cards don't, like included rental car insurance and lost luggage reimbursement.

“A big benefit of using a credit card is the opportunity to earn points,” says Brabham. “Smart consumers that are willing to put in just a little time to learn can benefit greatly from credit card points that lead to free air travel, dining, hotel stays, and retail purchases.”

Most importantly, though, credit cards can help you build and improve your credit — as long as you make your payments on time and don't overdo it on your balances. Otherwise, it can do the opposite, reducing your score and financial prospects in the process.

You might also feel tempted to overspend on a credit card. And because they come with interest if you carry a balance, your purchases could end up costing much more in the long run.

“A credit card acts like an open tab at your favorite bar,” Argyle says. “It lets you borrow up to your preset limit, but if you don't settle the bill on time, interest charges start stacking up.”

When to use a debit card vs. a credit card

There's a time and place for both debit and credit cards. Debit cards, for example, may be a better way to “pay for everyday items without rolling over debt and incurring expensive fees and penalties,” Primavera says.

You also might use one if you're worried about overspending or making your card payments on time, as this could tank your credit score.

“If you hate debt and love simplicity, debit is your friend,” explains Argyle.

If you need to purchase something expensive and don't have the cash on hand, a credit card can help you pay for it. You might also want to use it if your card offers a perk that could be helpful — a discount on the brand you're buying, some sort of warranty or insurance policy, or rewards for the trip you're booking, for example.

Credit cards are also a good idea if you want to build your credit and know you can make on-time payments each month.

“If you're looking at building or maintaining a high credit score, then using your credit card is the way to go,” says Primavera. “Making timely payments demonstrates dependability to the credit bureaus.”

Primavera adds that it can also get you better loan terms, lower interest rates, and higher loan amounts should you need to borrow money later on.

How debit and credit affect your financial health

One thing to think about when using a debit or credit card is the impact it will have on your financial health.

While a debit card won't affect your credit score, a credit card will. And since your credit score has a significant influence on your ability to do everything from getting a mortgage to qualifying for a lower insurance premium or renting a new apartment, managing your credit irresponsibly can have far-reaching financial consequences.

“Credit cards can be a financial power move,” says Argyle. “Paying on time and keeping a low balance boosts your credit score, helping you qualify for loans, mortgages, and better interest rates. But overspending? Missing payments? You're in the fast lane to financial ruin.”

The temptation to overspend — plus the interest charges — is another financial consideration to take into account with credit cards. If you're not careful, it can be “insidious,” Brabham says, putting you in a cycle of debt you might have trouble getting out of.

“The big risk with credit cards is accumulating high-interest-rate debt,” explains Brabham. “Today, we all, at some point, fall victim to the need for immediate gratification. This can lead to overspending and digging the proverbial debt hole that so many Americans find themselves in currently.”