Debit or Credit — What’s the Difference?

The end of the year is a time for holiday shopping, and many consumers face the new year with high credit card bills. If that sounds familiar, you might wish you had bought some of those gifts directly out of your bank account with a debit card instead of putting off payment with a credit card — and risking the potential for high interest charges if you can’t pay on time. But there are good reasons to use a credit card for certain transactions.

Fraud protection. In general, you are liable for no more than $50 in fraudulent credit card charges. For debit cards, a $50 limit applies only if a lost card or PIN is reported within two business days. The limit is $500 if reported within 60 days after receiving your statement, with unlimited liability after that. A credit card may be safer in higher-risk situations, such as when shopping online, when the card will leave your sight (as in a restaurant), or when you are concerned about a card reader. If you regularly use a debit card in these situations, you may want to maintain a lower checking balance and keep most of your funds in savings.

Merchant disputes. You can dispute a credit card charge before paying your bill and should not have to pay it while the charge is under dispute. Disputing a debit card charge can be more difficult when the charge has been deducted from your account, and it may take some time before the funds are returned. Also, merchants sometimes place a temporary hold on your account until a charge clears; for example, a hotel may place a hold for the full amount of your stay plus incidentals. If the situation changes, this could be more difficult to reverse with a debit card.

Rewards and extra benefits. Whereas debit cards offer little or no additional benefits, some credit cards offer cash-back rewards, and major cards typically include extra benefits such as travel insurance, extended warranties, and secondary collision and theft coverage for rental cars (up to policy limits). Of course, if you do not pay your credit card bill in full each month, the interest could far outweigh any financial rewards.

Credit history. Using a credit card can affect your credit score positively or negatively, depending on how you use it. A debit card has no effect on your credit.

Pick Your Plastic

Consumers use debit cards more often than credit cards, but the average value of credit card transactions is higher than that of debit card transactions. This suggests debit cards are typically used for regular expenses and credit cards for “extras.”

Comparing debit and credit card transactions: Annual transactions - debit 106 billion, credit 51.5 billion; total value - debit $4.6 trillion, credit $4.9 trillion; average transaction value - debit $43, credit $96

Source: Federal Reserve, 2023 (2021 data, most recent available)

Considering the additional protections and benefits, a credit card may be a better choice in some situations — but only if you pay your monthly bill on time. Also be aware that some merchants charge more for using a credit card than a debit card, passing their own fees to the consumer.