If you’re a credit card loyalist, you might be charging every possible purchase. But are there any occasions where you should consider using cash, or even a debit card instead? This guide will tell you everything you need to choose the right payment method.
You stop in your local coffee shop to buy a latte and a cookie. Should you pay with your debit card or your credit card? What if you’re buying a big-ticket item such as a flat-screen TV or filling your car’s tank at the gas pump? What’s the right way to pay for these purchases?
You might not think it makes much difference which type of plastic you use. But credit and financial experts say how you pay can impact your financial health.
Here’s a look at the big differences between credit cards and debit cards, and when it makes the most sense to use them.
What is a credit card?
When you make a purchase with a credit card, you use a portion of that card’s available credit. How much the bank allows you to borrow at one time (also known as your credit limit) will vary depending on your credit history and credit score.
You’ll receive a bill once a month and you’re required to make at least a minimum payment. If you don’t make this payment, you’ll get hit with a penalty, and your card provider might increase your card’s interest rate.
See related: How to lower your credit card interest rate
If you pay off your full credit card balance each month, you won’t have to pay interest. If you only pay off a portion, though, you’ll be charged interest on whatever amount of your balance you didn’t pay off.
Interest rates are high on credit cards: the average rate currently sits at 15.97%. You could end up paying a lot in interest depending on how much of your balance you carry over from month to month. It’s why financial experts recommend that you always pay your full balance off each month.
Why to use a credit card
Using credit cards comes with several perks that you won’t get with debit cards or cash:
Building your credit score
A big perk about credit cards is that they can help you boost your credit score, as long as you use the card properly.
“Using a debit card or cash to pay for your goods doesn’t impact your credit score at all,” says Jeff Rose, a certified financial planner and CEO of Good Financial Cents said. “Credit cards are a great way to build your credit.”
If you purchase items with your credit card and then make your credit card payment on time each month, that good behavior is reported to the credit bureaus. A record of on-time payments will steadily improve your credit score.
If you pay your bill on time but carry a balance on your card from month to month, your credit score won’t be impacted. But you will get hit by high interest rates, which can cause your debt to grow quickly. The money you pay out in interest could outweigh the benefits to your credit score.
Credit cards are a safer way to make purchases than debit cards.
If someone steals your debit card or that card’s account number, that thief can immediately withdraw funds from your checking account, perhaps draining it before you’re even aware of the theft. If someone steals your wallet full of cash, that money is probably long gone.
Scammers can also steal your credit card information and use it to rack up unauthorized charges in your name, but they do not have immediate access to your money, which will give you some time to dispute the charge before you’d be responsible to pay.
Using credit cards can help you build up rewards. You can’t earn these rewards with cash or most debit cards.
“For me, it’s 100% credit card for all of life’s purchases,” says Michael Foguth said, founder of Foguth Financial Group. “I want to be rewarded for all of my purchases.”
This doesn’t mean Foguth avoids other forms of payment entirely. He carries at least some cash at all times. That’s in case he encounters a merchant that doesn’t take credit cards or if a retailer’s credit card machine is out of order.
What is a debit card?
A debit card can give you easy access to cash because it is connected to a checking account at your bank. You can also use your debit card to withdraw money from your checking or savings account through ATMs. You’ll need to know your debit card’s PIN to make a withdrawal.
See Related: Best prepaid cards and debit cards
When you use this card to make purchases, the money is automatically withdrawn from your checking account. Because of this, you can’t use a debit card to spend more than what is currently in your bank account. It also lacks certain perks that credit cards have.
Since the money comes directly out of your account, banks don’t report it to the credit bureaus. So using a debit card won’t help you build credit.
Debit cards also come with a higher risk than credit cards, says Lane. If a hacker steals your debit card information, they can immediately drain your bank account. You might eventually get the money back after reporting the crime, but this could take time. If you’re living paycheck to paycheck, waiting for the money to return could cause a domino effect, with missed payments and a hit to your credit score, says Lane.
When to use a debit card
Most of the time, it makes more sense to use a credit card. But there are instances where it might make more sense to forego credit in place of a debit card:
You’re worried about overspending
Krista Goodrich, a Daytona Beach, Florida-based author of “The Boss Lady Investor: You Don’t Need a Di*k to Understand Money,” warns that credit cards can be trouble for consumers who have a habit of overspending or not paying their bills on time.
Paying a credit card 30 days or more late can cause your credit score to plummet – often by 100 points or more. And if you carry a balance from month to month, the high interest rates that come with a credit card can cause your debt to grow quickly.
If you struggle with budgeting, paying your bills on time or overspending, it might make more sense to pay for purchases with a debit card. This will prevent you from carrying an expensive credit card balance each month. Limiting yourself to purchases with your debit card might also force you to skip some purchases you can’t really afford.
“If you’re the type of person who sees something and immediately wants to buy it, credit cards can be devastating,” Goodrich said. “We all know people who can’t manage their spending. If you have multiple cards and you can’t control your spending, you’ll have way too many opportunities to hurt yourself financially.”
See related: 8 things you must know about credit card debt
You want to make a small purchase
Despite his preference for credit cards, Lane uses debit cards for small transactions like morning coffee, because he doesn’t like to carry cash. But he’s also set up a separate bank account for his debit card purchases. That account only has a small amount of money in it at any one time, usually around $200.
That way, if someone does steal his debit card information, he’s only at risk to lose a small amount of money.
But Foguth sees little reason to ever use a debit card.
“The only time I can think to use a debit card is if you need cash and you are at an ATM,” he said. “If it’s a choice between debit and credit, I use credit. The rewards are too valuable to pass up.”
Instances where it makes more sense to use cash are rare. It’s not safe to carry large amounts of cash with you. If it is stolen, it’s gone. You don’t get the extra protection that comes with paying by credit card.
There are times, though, when paying by cash is necessary. Some businesses still only accept cash payments. And then there’s the matter of tipping.
“Tipping is the one instance when I find myself at a loss by not having cash on me,” Lane said.
Goodrich adds that paying in cash can sometimes bring you solid bargains, especially if you have a large amount of it. That’s because you can usually buy big-ticket items such as cars, boats, hot tubs or even houses at a discount if you offer to pay for them in cash.
Sellers like the liquidity of cash and are sometimes willing to sell their big items for less because cash is convenient. Goodrich said she has twice purchased vehicles for from $7,000 to $10,000 less than asking price because she offered to pay for them in cash.
And Goodrich says the ability to buy a home with cash gives you a big advantage. This is especially true if you are competing with other possible buyers. Sellers prefer the rare cash offer because they don’t have to worry that a buyer’s financing will fall through. You might even be able to pay a lesser price for the house because sellers are so eager for cash offers.
It’s good to have choices when making a purchase. You should, though, consider the pros and cons of using either credit or debit cards. In most cases, using your credit card to make your latest purchase is the smarter move. But in the rare case, you might instead choose cash or your debit card.