Debit or Credit? Here’s When to Use Each, and Why

The right decision can depend on the scenario and certain factors, including how good you are at managing money.
by Ellen Sheng |January 25, 2024

When it comes to paying for things, debit cards and credit cards are both handy, and swiping, tapping or entering numbers for one versus the other feels similar. But they’re connected to different accounts. Is there a right occasion to use debit or credit? Here are considerations that can help you decide.

Using a debit card 

A debit card is directly connected to your bank account, drawing money from either a checking or savings account. If you have a checking account, you’ll likely receive a debit card soon after opening the account. Savings accounts typically don’t offer debit cards for spending but may offer cards for ATM withdrawals. Some cards, like prepaid debit cards, have a fixed spending amount, similar to a cash card.

When using a debit card, you’re essentially using cash directly from your bank account, so they can be a good choice for everyday purchases like grabbing lunch or a quick coffee, or buying groceries or gas. These days, many debit cards are linked to major credit card issuers, allowing you to use them almost anywhere you’d use a credit card. However, because a debit card uses cash, there may be spending limits based on your account balance.

Paying with debit is particularly helpful for people concerned about accumulating debt, says Jing Jian Xiao, a professor at University of Rhode Island who teaches consumer economics and personal finance. “A debit card will really help you to control your spending because you cannot overspend; you only spend whatever you have,” he says.  

You do need to track your bank balance carefully when using a debit card, though. If your account balance is low but your electric bill and car payment withdraw on the same day, you could end up getting hit with an overdraft fee. To avoid this scenario, monitor your bank balance carefully, set up low-balance alerts and plan your spending when you can. You might also want to sign up for overdraft coverage. This will cover the overdraft amount, so your transaction isn’t denied, but you’ll want to pay the balance promptly to avoid or lessen any fees.

One downside of debit cards can be the limited fraud protection. If you lose your debit card or someone uses it without your permission, they could gain access to the cash in your bank account. To mitigate this, some financial institutions offer a locking feature that allows you to quickly lock your debit card online or on the bank’s app if you misplace the card or suspect fraud. Either way, if you do see an unauthorized transaction on your debit card, it’s important to report it immediately to dispute the charge. (Your bank should guide you through the process and open an investigation.) If you notify the bank within two days of learning of the loss or theft, the bank cannot hold you responsible for more than the amount of any unauthorized transactions or $50, whichever is less. But if you notify after two days, you could be responsible for up to $500. If you take more than 60 days, you could be responsible for the full amount.

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Using a credit card 

Unlike a debit card, a credit card provides the ability to borrow from a line of credit issued by a financial institution where interest and fees may be assessed. Required payments from what’s borrowed must be made in a timely way. Credit cards require an application process but can be a draw, in part, because many offer perks like the ability to earn cash back, airline miles or points. Some retailers and companies partner with financial institutions to offer credit cards with special incentives too.

Credit cards are crucial for building credit, which is important if you plan to borrow money —  to buy a car or a house, for instance.  They can have generous credit limits, and credit cards also come with strong fraud protection. Federal law protects consumers from unauthorized charges and limits your maximum liability to $50, so long as you report the unauthorized charges within the required 60 days.

The flipside to the advantages of credit cards is that it can be easy to overspend and accumulate high-interest debt. (Credit card interest fluctuates depending on what the Federal Reserve is doing, and rates currently range between 20% to 30%. According to the latest report from the Federal Reserve Bank of New York, Americans now have more than a $1 trillion in credit card debt.) To avoid spending more than you intend, it can be helpful to create a budget and use the credit card only for purchases you can pay off within a month, before the interest kicks in. If you’re finding it hard to control your spending, a debit card may be beneficial in helping you set boundaries for your money.

The bottom line on both types of cards

When it comes to choosing debit or credit, the most important consideration is “strength of self-control in respect to spending,” according to Hersh Shefin, a finance professor at Santa Clara University’s Leavey School of Business, who studies behavioral finance. If this is a concern for you, a debit card may be the way to go for routine expenses like gas and groceries because it forces you to spend within the limits of your bank account. On the other hand, households that do have monthly budgets are “typically fine to use credit cards instead of debit cards, as they sensibly manage credit card debt,” he says. And they can then take advantage of perks like cash back and airline points.

Additionally, if you have a large expense – say, airplane tickets or gifts, a pricey car repair or medical expense — a credit card can be the better choice because it offers more fraud protection and can cover the amount without you having to worry about the state of your bank balance at the moment. That said, you’ll want to have enough savings to draw from to pay off the charge promptly and avoid getting hit with fees and interest.

The content reflects the view of the authors of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.