Credit vs. Debit: What's the Smart Choice?

Ever wondered about using a debit card versus a credit card for purchases? While those thin plastic cards are hard to tell apart in your wallet, they use your money differently. Thankfully, there are general rules of thumb that can help you use both in smart ways.

When to Use a Credit Card

Credit cards allow you to borrow money for purchases up to a predetermined limit. You're charged an annual percentage rate (APR) on the amount you borrow, and you may also incur annual fees depending on your card type. Certain credit cards allow you to earn rewards points for travel or cash back depending on the types of purchases you make. And no matter what card you choose, a credit card that is used regularly and paid in a timely manner each month can help you build a solid credit history.

While using a credit card means you're choosing to go into debt for the purchases you make, that's not always a negative choice. There are many times when using your credit card is the safer or more economical option, including:

• When shopping online: While most eCommerce sites are secure, data breaches happen all the time. You don't want to run the risk of someone on the internet gaining access to your personal checking account. Use a credit card for the anti-fraud benefits it offers and to keep your checking account off-limits to cyber criminals.
• When making a big purchase: Many credit cards offer purchase protection, though the timeframe and dollar amount covered varies. Some cards offer extended benefits, like covering theft. Be sure to check your card's specific protection details.
• When traveling: Many credit cards offer travel protection, and almost all of them offer anti-fraud benefits. If you're going abroad, find a credit card that doesn't charge a foreign transaction fee – a fee found with most debit cards that can tack on 2-3% for every swipe.
• When you stay at a hotel: Virtually all hotels ask for a plastic card (debit or credit) to use for incidental charges you make during your stay. Typically, the hotel will put a hold on your card to cover any costs. If you don't spend it, the money gets put back on your card. But sometimes it takes several days for that hold to come off, and if you used a debit card, that means you can't use the funds to pay bills or anything else.

When to Use a Debit Card for Purchases

Whether you want to diligently track all your purchases, or you simply don't feel comfortable carrying around a lot of cash, debit cards offer the best solution for spending what you have in a convenient, safe way. Here are the ideal times to use your debit card:

• When you're on a budget: Whether you just want to monitor where your money is going, or ensure you don't spend what you don't have, a debit card is the right choice.
• When you want the best exchange rate on foreign currency: While a credit card is typically the best choice for traveling abroad, if you need actual currency, take your debit card to an ATM to get the "wholesale" exchange rate.
• When you've abused credit cards in the past: While there are many perks to using credit cards, they aren't the best choice for everyone. If you lack discipline in paying down the debt quickly, choose debit instead so you don't put yourself in a financial bind.

Credit vs. Debit at a POS

When you have a debit card issued by your financial institution with a Visa or Mastercard logo on it, it can be confusing to know which option you should choose. These types of debit cards give you a choice of how your payment gets processed at points of sale (POS).

If you choose "debit," you'll enter your PIN and the merchant will receive the funds immediately from your banking institution. Done and done.

If you choose "credit," the payment to the merchant is processed through the credit issuer (Visa or Mastercard) and may take longer to be deducted from your account. This can be a more secure way to use your debit card, since you won't have to input your PIN. The merchant also has to pay a fee associated with this form of payment, which could trickle down into higher prices for their goods or services (something to consider, particularly if you are shopping at a small business). And whether you choose "debit" or "credit" at the POS, keep in mind that the funds being used are yours, so a debit card is not the right option if your goal is to build credit.

Taking the time to assess your spending habits and goals will help you find and use a plastic card in a way that maximizes benefits and limits your risk.