When to use debit versus credit
Compare debit card and credit card benefits when deciding which one to use and when to use it.
"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 or 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 with a credit card or debit card
Most retail locations accept both types of cards, and you use them in the same way. For an in-person transaction, you tap using the contactless feature, insert the chip into the card reader or swipe. For an online purchase, you enter the credit card or debit card number and other required details like the expiration date and security code.
Credit cards or debit cards are both associated to a payment processing network (Opens in New Window).See note1 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 report (Opens in New Window)See note1 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 permission.
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 sign up 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 debited from your account.
Credit cards generally offer better protection against unauthorized transactions than debit cards (Opens in New Window).See note1 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 USAA credit cards, guarantee you have no obligation to pay anything in the case of a reported unauthorized charge.See note2
Credit, overdrafts and penalty fees
Remember that a debit card is drawing money from your savings or checking 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 and the merchant, 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.
You need to pay at least the minimum payment amount before the payment due date on your monthly credit card bill. Failing to do so could hurt your credit score and you may incur a penalty fee. You can't make a purchase that exceeds your credit limit unless your 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. Americans 65 and older (Opens in New Window)See note1 are most likely to use a debit card.
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 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 credit cards.
Video Transcript: How to choose your next credit card
Video Duration: 3 minutes 20 seconds
Transcript Date: June 29, 2023
Choosing your card: Elapsed time 0 minutes, 0 seconds [0:00]
Sometimes you may receive credit card offers, but how do you know which card is right for you? The right card for you often comes down to your credit history, spending habits, how you manage your repayments and a card's APR, or annual percentage rate — a credit card's yearly interest rate. In general, there are four types of credit cards: rewards points, cash back, low rate and secured.
Rewards points or cash back: Elapsed time 0 minutes, 17 seconds [0:17]
If you pay off your balance each month or at least in a relatively short period, you could consider a rewards points or cashback credit card. Be aware that they typically have APRs starting in the double digits. Both tend to cater more toward those with at least some track record of positive credit usage.
A rewards points card typically offers reward points on qualifying purchases that you can redeem for cash back, gift cards and more. It could also offer miles that could be applied towards travel. You may receive more points in one purchase category over another, such as dining versus gas stations, so picking a card that matches your spending habits maximizes your rewards.
A cashback card is like a rewards points card, but you earn cash back with each qualifying purchase instead of rewards. Although some credit cards pay the same cash back rate regardless of where you spend or what you buy, others may have a cap or earn different amounts on certain spending categories, so be sure to read the fine print. Choosing a card that matches your spending habits can be a good thing to consider.
Low rate or secured card: Elapsed time 1 minute, 27 seconds [1:27]
If you tend to carry a balance from month-to-month or are trying to build credit, consider a low-rate or secured card.
A low-rate card usually doesn't accumulate rewards or cash back, but instead typically has a lower APR. The lower the rate, the less it will cost you in interest to carry a balance into the next billing period. The actual APR will vary depending on your credit profile and other factors.
A secured card offers you a spending limit based on the security or deposit you place with the card issuer and is best suited for someone looking to establish or re-build credit. Credit card issuers may be more willing to approve someone with little to no credit history, or someone with damaged credit history, if there's a deposit that covers the amount that can be borrowed on the card.
Additional considerations: Elapsed time 2 minutes, 12 seconds [2:12]
In addition to the APR and the type of rewards or cash back, you'll want to consider any promotional rates that may be offered for a limited time period, fees associated with the card, penalties for missed or late payments, and any other terms and conditions. Military members and those who travel should consider any foreign transaction fees that a credit card may have.
You'll also want to consider other benefits associated with the card like extended warranties, travel protection or price protection to name a few. You can find out more by reading the credit card's Terms and Conditions.
Pick a card for your budget: Elapsed time 2 minutes, 43 seconds [2:43]
So which credit card should you choose?
The credit card that matches you, which means being honest with yourself about your spending habits and how you manage repayments. It also means avoiding the temptation to apply for a card just because of the rewards without considering the interest rate or annual fee. Ask yourself: Do the benefits outweigh the potential cost? At the end of the day, managing your credit card usage in a responsible manner can help set you on the path to financial security.
Visit usaa.com/creditcards to learn more about the credit cards USAA has to offer.
[Description of visual information: The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.
Bank products offered by USAA Federal Savings Bank, Member FDIC. Credit card, mortgage and other lending products not FDIC-insured.] End of description.
End: Elapsed time 3 minutes, 20 seconds [3:20]
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.
As noted previously, credit cards may work differently in the event of a fraudulent transaction than a debit card does, offering the potential for better protection. Some banks, including USAA, offer zero liability protections for both debit cardsSee note3 and credit cardsSee note2 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 Commission (Opens in New Window),See note1 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 New Window).See note1
The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.