When to use debit versus credit

"Credit or debit?”

You're asked that question almost daily by people and machines everywhere from the grocery store to the gas pump.

It's worth taking the time to review the differences between debit cards and credit cards, and whether you're helping yourself with your choices of what to carry in your wallet and what to use for different purchases.

Similarities between credit cards and debit cards.

Most retail locations accept both types of cards, and you use them in the same way. For an in-person transaction, you can tap using the contactless feature, insert the chip into the card reader or swipe. For an online purchase, you can enter the credit card or debit card number and other required details like the expiration date and security code.

Credit cards and debit cards are both associated to a payment processing network. You're familiar with these names: Mastercard®, Visa®, American Express® and Discover®. They are the four largest in the United States. Interac is the leading network in Canada. JCB (Japan Credit Bureau) started in Japan and is now a network option in more than 20 countries around the world.

Whether you have a debit card, a credit card or both, keep your cards safe. If someone has your account number, your identity and funds may be at risk. Built-in protections usually come with each type of card, but you can do your part to prevent confidential account information from being leaked to scammers and thieves. Examples include regularly reviewing your checking account for debit card activity, inspecting credit card activity, checking your credit reportOpens in New Window‍ ‍ ^{See note 1} and reporting a lost card quickly to your bank or card issuer.

How debit cards and credit cards differ.

The fundamental difference between a debit card and a credit card is how each type draws money to complete a transaction.

Debit cards use deposited dollars

Debit cards are linked to your checking account and pull funds from those accounts when you use the debit card to make a purchase, sign up for a subscription or membership service or use an ATM.

When you use your debit card, the money is deducted from your account. The money in your account is deposited by you or by a third party like an employer with your authorization.

Some specialty deposit accounts, such as a health care savings account (HSA), come with a debit card. Also, many government benefits are delivered with a special type of debit card, an electronic benefits transfer (EBT). Examples include unemployment benefits or nutrition assistance benefits.

Credit cards use borrowed dollars

A credit card represents a revolving line of credit. You're borrowing money from a lender to be paid back later. When you use a credit card to complete a purchase or get a cash advance, the cost is charged to that line of credit and becomes part of your outstanding balance that you need to repay, usually with interest when not repaid in full by the initial due date.

Credit cards vary in the terms they offer you as a borrower. Your annual percentage rate (APR), your total credit limit and any added benefits will vary by the credit card type and by your credit history and credit score. It's wise to compare what different credit cards offer before you apply for one. It's also wise to fully understand what you may already be carrying in your wallet.

More differences between credit cards and debit cards.

Timing

With debit cards, there may be a waiting period, in which the merchant contacts your bank for payment authorization. This is the time between the authorization and when the transaction is posted. If so, the purchase may show up as "pending" on your account summary until the transaction is finalized.

When you use your credit card, money doesn't immediately leave your checking or savings account until you make a payment toward your credit card's outstanding balance.

Fraud and identity theft protection

Debit cards transfer funds directly out of your account. If you're the victim of an unauthorized transaction, you should contact your bank as soon as possible. Your bank will investigate promptly and may provide you with a provisional credit to your account while they do so. If they determine that the transaction was not unauthorized, you would be responsible for the disputed amount and any provisional credit provided would be removed from your account.

Credit cards generally offer better protection against unauthorized transactions. First, you could dispute a charge to your credit card before you lose any funds, assuming you dispute fraudulent charges before paying the balance. During the disputed period, you will not have to pay this portion of your credit card bill; however, if the card issuer does not find in your favor, you would be responsible for the disputed amount. Second, if they find in your favor, the maximum amount you're required to pay in case of a reported fraudulent credit card charge is $50. Some credit cards, including those from USAA Federal Savings Bank, include zero-liability‍ ‍ ^{See note 2} which offers no obligation to pay anything in the case of a reported unauthorized charge.

Credit, overdrafts and penalty fees

Remember that a debit card is drawing money from your bank account for cash back or a purchase. If you have insufficient funds in your deposit account and the bank covers the item, it could result in an overdraft. You may face penalty fees from your bank or loss of fee waivers that depend on keeping a minimum balance in your account. Some transactions may also simply be denied due to insufficient funds, which can result in merchant fees.

You need to pay at least the minimum payment amount by the payment due date on your monthly credit card bill. Failing to do so could hurt your credit score and you may incur a late fee. You can't make a purchase that exceeds your credit limit unless your credit card issuer allows this.

Transaction limits

Your debit card may be assigned daily dollar purchase and ATM withdrawal limits, regardless of your total account balance.

The amount you can charge is determined by the credit limit of the credit card. And that total limit may be determined by your income, the total amount of debt you have outstanding and your credit score.

When to use debit versus credit.

Whether you use a credit card or a debit card is often a matter of preference. You may find using a debit card benefits your savings goals by helping prevent yourself and your family from accumulating debt or from impulsive spending.

You may also just tend to use a debit card based on your age. A recent survey revealed that Gen Z prefers debit cards to credit cardsOpens in New Window.‍ ‍ ^{See note 1}

And finally, you may not qualify for a credit card, either because of your age (you need to be at least 21 or 18 with proof of income), your credit history or your debt-to-income ratio.

On the other hand, there may be benefits of a credit card that debit cards typically don't offer, although there are some debit cards that do earn rewards. Many credit cards offer rewards that can earn you cash or points on your purchases. Credit cards often also provide additional benefits and coverage on travel and large purchases. These range from extended warranties to lost luggage protection to loyalty programs that offer you points you can exchange for discounts. Learn more about the benefits of USAA Bank credit cards.

Credit cards may also offer introductory or promotional APRs, no foreign transaction fees, which are especially useful to active military deployed abroad, and $0 annual fees. Since payment history and monthly balance are reported to the credit bureaus, credit cards can also help you build credit, when used responsibly. Debit card transactions aren't reported to credit bureaus, though your deposit account history may be reported to specialty consumer reporting agencies.

As noted previously, credit cards may work differently in the event of a fraudulent transaction, offering the potential for better protection. Some banks, including USAA Bank, offer zero liability protections for both debit cards‍ ‍ ^{See note 3} and credit cards‍ ‍ ^{See note 2} in the case of a reported unauthorized charge.

This fraud protection may make credit cards an overall safer choice for active-duty military personnel and their families. That's because, according to a study by the Federal Trade CommissionOpens in New Window,‍ ‍ ^{See note 1} service members are at increased risk of fraud of several types — use of stolen information to open a new account, use of an existing account to make unauthorized purchases and use of a debit card or other electronic means to steal funds from an account. Servicemembers should consider adding an active duty alert to their credit profiles to help reduce fraud risk.

Some final tips.

• Both credit cards and debit cards can be helpful tools, if you practice financial discipline about managing your money — planning your expenses with a budget, building savings for future goals, and paying your bills on time, every time.
• Even a simple step like keeping unused or infrequently used credit cards or debit cards in a safe place at home, rather than carrying them daily in your wallet, can help keep you on track with your spending and prevent thieves from getting your account information.
• When the bank or card issuer issuing your debit card or credit card sends you an update regarding the terms and rules on your account, take the time to read it and reach out to them if you have questions. The interest earned on a deposit account, or the APR charged on a credit card can change, as can the amount of penalty fees.
• If you ever have trouble paying your credit card balance, let your card issuer know as soon as you know you'll miss a payment deadline. They can explain your options to defer or restructure your payments. Acting quickly can control a family financial emergency, help you avoid more serious consequences and lead you to additional resources to help protect your health — by reducing stress — and future financial goals.

Active military may qualify for special arrangements, including relief for debt built before your service started, outlined in the Servicemembers Civil Relief Act (SCRA)Opens in a New Window.‍ ‍ ^{See note 1}