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Credit vs. debit cards: Which is the smarter choice?

Sept. 03, 2022
7 min read
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On the outside, credit cards and debit cards look a lot alike: Both have 15-16 digits, expiration dates and security codes.

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But in reality, credit cards and debit cards are not the same, and there’s often debate in the financial world over which type of plastic is best for the consumer. Some financial pros are firmly in the pro-debit-card (or cash) camp, but here at TPG, we believe that credit cards are a much better choice for your spending.

Related: Reasons why you shouldn’t use your debit card

In this guide, we’ll break down how debit and credit cards work and the three reasons why I think it’s better to keep your debit card in your wallet and pay with a credit card instead.

The mechanics of credit and debit cards

Debit cards are tied to your bank accounts. When you use your debit card to make a charge, the funds are withdrawn right away (or within a few days) from your account. If you try to use your debit card for a purchase that costs more money than you have deposited, your bank will generally decline the transaction.

Your credit card, on the other hand, works like a portable, flexible loan. You can borrow money (up to your credit limit), pay it off and borrow again. You can repeat this process repeatedly as long as your account is open and in good standing.

As you use your credit card through a billing cycle, your charges are tallied up on your monthly statement. It’s up to you whether to pay off your entire balance by the due date (strongly recommended) or to make at least the minimum payment toward the amount you owe.

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Related: TPG’s 10 commandments for credit cards

Some people avoid credit cards due to the fear of getting into serious financial trouble with credit card debt. This is a valid concern since credit card interest rates are generally high and can add up quickly. You should certainly work to avoid credit card debt, but you can still reap credit cards' many rewards by practicing responsible credit card use.

Credit cards offer superior protection than debit cards

Putting points and miles aside for a moment — just for a moment — the best perk that comes from credit cards is the protection that those pieces of plastic (or metal) offer.

Firstly, credit cards protect you from liability for fraudulent transactions. If you lose a card or it’s stolen and someone else starts charging on it, the federal government has your back.

The Fair Credit Billing Act (FCBA) limits your liability for fraudulent transactions on your credit card to just $50 (and most major card issuers waive even this responsibility as a matter of policy). Simply report the unauthorized transaction within 60 days of your statement date and you’re covered.

Debit cards are protected from fraudulent transactions, too, thanks to the Electronic Funds Transfer Act (EFTA). However, your liability shoots up to $500 if you don’t catch and report the problem within two business days. Also, the money in your bank account can be tied up while the bank investigates the fraud, which could be a serious problem if you have bills coming due in the meantime.

Credit cards will generally limit fraud to $50 whereas you're liable for up to $500 on your debit card. GETTY IMAGES

Another credit card protection arises if there’s a problem with the goods or services you bought: your card issuer might help you get your money back. This protection is, once again, thanks to the FCBA. Imagine you ordered a product but never received it. Of course, you should try to work things out with the merchant first. But if the merchant won’t help you (it happens), you could dispute the charge with your card issuer.

If you’d paid for the same purchase with a debit card, your bank isn’t legally obligated to take or investigate a dispute. The only type of dispute banks have to investigate under the EFTA is fraudulent charges on your debit card.

Lastly, your credit card may also come with added benefits, including purchase protection, extended warranties and price protection. These perks might help you when an item you purchase breaks (or is lost) or when the price of an item you bought suddenly drops. Not every credit card offers these great benefits, but they’re practically unheard of with debit cards.

Credit cards help you build credit

I prefer credit cards to debit cards for another important reason: my cards have helped me build a healthy credit profile over the years. My debit card doesn’t help me improve my credit reports or scores whatsoever.

CNYTHZL/GETTY IMAGES

Credit card issuers generally report accounts to all three major credit bureaus (Equifax, TransUnion and Experian). As long as you manage your accounts wisely (pay them on time and in full every month), credit cards can help you build solid credit scores over time. The older your credit cards become with a positive payment record, the more your credit score will benefit.

Related: 6 things to do to improve your credit

You can earn rewards with credit cards

Finally, I love using my credit cards for purchases because of the rewards they offer. In the past six months alone, I earned and redeemed nearly $3,500 worth of free travel — all courtesy of my rewards credit cards.

JW MARRIOTT GOLD COAST RESORT

Best of all, I didn’t have to spend any extra money to earn these rewards. I used my credit card to pay for purchases I needed to make anyway. Even though some cards carry an annual fee, the benefits almost always outweigh any additional cost. If I had used my debit card to cover my spending instead, I would have missed out on this great benefit. In general, using a debit card for purchases doesn’t give you anything in return.

If you want to start putting together a strategy to earn credit card rewards from your everyday spending, TPG’s beginner’s guide to earning points and miles is a great place to start.

Bottom line

When you use credit cards responsibly, they’re a smarter spending choice than a debit card — with the major caveat of avoiding credit card debt.

If you’re worried about charging more than you can afford to pay off on a credit card, there are convenient ways to track your spending. You can use a money management app, a note on your phone or even old-fashioned pen and paper to set spending goals and stick with them.

As soon as you trust yourself to use credit cards responsibly, it’s time to put away your debit card and start reaping some rewards.

Additional reporting by Emily Thompson and Stella Shon.

Featured image by LA Times via Getty Images
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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