Why You Should Always Choose Credit Over Debit

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For a long time, most purchases were made with either cash or checks. Credit cards were only used for larger purchases that needed to be paid off over months or years. However, in recent times, more and more people have begun using credit cards for all of their purchases, big or small. On the other hand, some people use their debit cards for everything. Many people don’t even carry cash on them anymore and use either a credit card or debit card exclusively.

Whether or not it’s a good idea to use a credit card for all of your purchases is a controversial topic in the personal finance world. Those who are against using credit cards often cite the fact that credit cards charge an interest rate on outstanding balances and that, if you aren’t careful, irresponsible use of a credit card can put you in debt. In fact, these arguments are entirely accurate. And, if you’re going to use a credit card, you should learn how to use it responsibly. 

However, if you can use your credit card responsibly (and avoid incurring interest payments or getting yourself into debt), then it actually makes sense to make nearly every single one of your purchases on credit. This is true for a few main reasons: 

• Credit cards have stronger fraud protection than cash or debit cards.
• Credit cards offer benefits and rewards, whereas cash and debit cards do not. 
• Credit cards help you build credit, whereas cash and debit cards do not. 
• Credit cards make it easier to track your expenses. 

Because of these advantages, we’d recommend using a credit card for almost all purchases instead of cash or a debit card (with certain exceptions). But, it’s important to understand that using a credit card will only help you financially if you can use it responsibly. If you aren’t a responsible credit card user, then spending on a credit card will almost always hurt your finances more than it will help them. 

How to Responsibly Use a Credit Card

The basic principle to responsible credit card use is to avoid spending more money than you have. So, while having a credit card in your pocket may feel like an unlimited reserve of free spending money, you will have to pay back every dollar that you spend on that card (or you’ll go into debt, which carries serious negative consequences). Here are a few tips to help you use your credit card responsibly: 

• Pay your balance in full each month. 
• Always pay your bill on time. 
• Keep your balance below 30% of your total available credit limit.

First and foremost, we’d recommend always being aware of how much money you have in your bank accounts before making purchases on your credit card. You should always make sure that you have enough money in your bank accounts to pay off your credit balance in full. Having a checking account with the same bank that issues your credit card will make this a lot easier, since you’ll be able to get a good snapshot of your finances by opening a single app. 

You should make sure to pay your credit balance off in full every month. This will ensure that your balance doesn’t balloon over several months and then you suddenly find yourself in a pile of debt. Paying off your balance in full every month will also help you avoid paying interest charges on your credit card. Credit cards charge interest on any unpaid balances that aren’t paid off by the due date. However, if you pay off your balance in full by the due date (which is typically at the end of the month), then you’ll never pay any interest. 

And, of course, you need to make sure that you make your payments on-time or you’ll end up negatively affecting your credit score. You can set recurring reminders on your phone, laptop and tablet to ensure that you always pay your credit card bill on time. 

Another important rule of thumb when using a credit card that most people are unaware of is that you should always try to keep your balance below 30% of your total available credit limit. For instance, if your credit limit is $10,000, then you should try to make sure that your balance is always below $3,000. The ratio of your balance to your total available credit is called your credit utilization ratio, and it’s a major determining factor for your credit score. So, if you want a healthy credit score, you should try to keep your credit utilization below 30%. And, if possible, you should actually keep it as low as 10%. 

Arguments for Credit Cards Over Debit Cards

Now that we’ve discussed how to responsibly use a credit card, let’s look at the several advantages that credit cards (when used responsibly) have over debit cards. 

Stronger Fraud Protections

One advantage of credit cards that people often overlook is the fact that they’re actually safer to carry with you than debit cards due to their strong fraud protections. Credit cards typically include what’s called zero liability protection, which means that you’ll never be responsible for paying for fraudulent purchases made on your credit card. 

For instance, if you report your card as lost or stolen and report any fraudulent transactions that appeared on your credit card account, those transactions will typically be removed from your credit balance within a day or two. When this happens, your credit card issuer has agreed to pay for these fraudulent purchases. 

By contrast, when someone makes a fraudulent purchase on your debit card, they’re taking money directly out of your checking account. If you report these fraudulent purchases immediately, you will typically get your money back. However, this process can take weeks or months, which means that you could be left with an empty bank account until the dispute is settled. And that could lead to all sorts of inconveniences and unfortunate situations. 

Benefits and Rewards

Perhaps the biggest advantage of credit cards over debit cards is that credit cards offer benefits and rewards. These benefits and rewards include welcome offers, spending bonuses and other perks. By using a debit card, you could be missing out on thousands of dollars in value that you could be reaping with a credit card. 

Welcome Bonuses

First of all, many credit cards offer an initial welcome bonus worth hundreds or even sometimes over a thousand dollars. These welcome bonuses typically require you to spend a certain amount of money on your card within a certain time period after account opening. Certain credit cards offer welcome bonuses in the form of cash back, while others offer rewards points.

For instance, when the Wells Fargo Autograph Journey℠ Visa® Card ($95 annual fee) was first released, it offered a welcome bonus of 60,000 Wells Fargo points for those who spent $4,000 in the first three months after account opening. 

When redeemed through the Wells Fargo Rewards portal, each Wells Fargo point is worth exactly 1 cent, which means that welcome bonus was worth at least $600. And, by redeeming Well Fargo points (as well as Amex points, Capital One miles, Chase points, Citi ThankYou points and more) through transfer partners, it’s possible to get more than 1 cent per point in value, which means that 60,000-point bonus could be worth significantly more than $600. 

Spending Bonuses

Apart from welcome bonuses, you’ll also earn spending bonuses on certain purchases with many credit cards. Like welcome bonuses, spending bonuses can either come in the form of cash back or rewards points. Typically, we prefer cards that offer rewards points as they can be redeemed through transfer partners for more than 1 cent per point in value, whereas cash back has a fixed value. However, if you prefer more simple rewards, then cash back might be a better option for you. 

Most credit cards offer a baseline spending bonus of at least 1X points or 1% cash back on all purchases and then offer elevated spending bonuses in categories such as groceries, travel, dining, gas stations and more. For instance, the Chase Sapphire Preferred® Card ($95 annual fee) offers the following spending bonuses: 

• 5X points on Lyft rides (through March 2025)
• 5X points on Peloton equipment and accessory purchases over $150 (through March 2025)
• 5X points on travel purchased through the Chase Travel℠
• 3X points on dining (including eligible delivery services, takeout and dining out)
• 3X points on online grocery purchases (excluding Target, Walmart and wholesale clubs)
• 3X points on select streaming services
• 2X points on other travel purchases
• 1X points on all other purchases

The following chart illustrates how many points you could earn in a single month with the Chase Sapphire Preferred card alone: 

Category	Monthly spending	Rewards rate	Total points per month
Lyft rides	$120	5X	600
Travel (purchased through Chase Ultimate Rewards)	$250	5X	1,250
Dining	$200	3X	600
Online grocery purchases	$200	3X	600
Select streaming services	$50	3X	150
Other travel purchases	$100	2X	200
Other purchases	$300	1X	300
Total	$1,220	N/A	3,700

As you can see, at the spending levels above (which are based on very conservative estimates), you’d earn 3,700 Chase points per month. However, with the Chase Sapphire Preferred Card, each Chase point is worth at least 1.25 cents when redeemed for travel through the Chase Chase Travel℠. 

Thus, at this spending level, you’d earn at least $46.25 toward travel per month or $555 toward travel per year, which is certainly significant and easily makes up for this card’s $95 annual fee. Plus, if you transfer those Chase points to travel partners, you could get more than 1.25 cents per point in value, meaning you could get far more than $555 per year in value if you’re savvy. 

Plus, by combining different credit cards with different spending bonuses, you can maximize your spending bonuses and earn even more points (or cash back) in every spending category. For example, as you can see above, the Chase Sapphire Preferred only offers 1X points on gas station purchases (as well as all other purchases). So, you could also sign up for the Wells Fargo Autograph℠ Card, which offers 3X points on gas station purchases and doesn’t charge any annual fee and use that card for all of your gas purchases. 

Other Benefits

In addition to earning cash back or rewards points, many credit cards also offer additional benefits. In order to receive these kinds of benefits, you’ll typically need to sign up for a credit card that charges an annual fee. However, you can get some great benefits with credit cards that have annual fees under $100 and even with some no-annual-fee credit cards. 

For example, the Wells Fargo Autograph Visa Card (no annual fee) offers cell phone damage and theft protection up to $600 per claim and up to $1,200 per 12-month period as long as you pay your cell phone bill with the card. This is an excellent benefit for a card without an annual fee, and it could end up saving you hundreds of dollars.

If you’re willing to pay an annual fee, you can vastly expand the benefits available to you. For instance, the Capital One Venture Rewards Credit Card ($95 annual fee) offers a $50 statement credit for hotel stays with the Lifestyle Collection (only bookable through the Capital One Travel portal) as well as a reimbursement credit of up to $120 for the application fee for either TSA PreCheck or Global Entry (available every four years). 

These kinds of benefits can offer hundreds of dollars in value per year. And, unfortunately, they aren’t available with debit cards. 

Building Credit

In today’s world, having a good credit score is essential to securing a comfortable financial future. Your credit score affects the interest rate you’ll receive when you apply for a mortgage (which can make a difference of thousands of dollars over the mortgage’s entire term), the interest rate you’ll receive on car loans, your ability to get an apartment and even whether or not you can get certain jobs. 

While you don’t technically have to have a credit card to have a good credit score, spending responsibly on a credit card is the best way to boost your credit score. And, while signing up for a credit card will actually result in your credit score dropping slightly, responsible credit card use over time can help you raise your credit score immensely. 

There are five main factors that affect your credit score (in descending order of influence): 

• Payment history (35%)
• Credit utilization ratio (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit accounts (10%)

Let’s take a look at how signing up for a credit card affects each of these factors and eventually helps you improve your credit score. 

Payment History (35%)

The biggest contributing factor to your credit score is your payment history, that is, the percentage of your payments that have been on time. Signing up for a credit card can quickly help you improve your payment history if you use it responsibly and make all your payments on time. 

As an example, let’s say that you’ve made 100 credit payments in the past, and 90 of them have been on-time. That means your current on-time payment percentage is 90%, which you’ll want to improve if you want to get a good credit score. If your only type of credit is a car loan and you make every car payment on time for the next 25 months, then your percentage would improve to 92% (115 on-time payments / 125 total payments = 92%). However, if you also had a credit card in addition to your car loan and you paid both on-time for the next 25 months, then your percentage would improve to 93% (140 on-time payments / 150 total payments = 93%). 

As you can see from the example above, having a credit card can help you raise your on-time payment percentage more quickly as long as you make all of your credit card payments on time. 

Credit Utilization Ratio (30%)

One of the most important contributing factors to your credit score is your credit utilization ratio, which is your total amount of debt across all of your accounts divided by the total amount of available credit you have. Here’s that formula written out: 

• Total amount owed / total available credit = credit utilization ratio

For instance, let’s say that you currently have two credit cards. One of these cards has a current balance of $3,000 and a limit of $10,000 and the other card has a current balance of $6,000 and a limit of $15,000. Here’s how you’d calculate your credit utilization ratio: 

• ($3,000 + $6,000) / ($10,000 + $15,000) = 36%

So, in the example above, the credit utilization ratio would be 36%, which is too high if you want to get a good credit score. However, let’s say that you sign up for a third credit card with a credit limit of $10,000 and you keep your spending patterns the same (meaning you don’t spend any money on the new credit card). This would be the new calculation for your credit utilization ratio: 

• ($3,000 + $6,000) / ($10,000 + $15,000 + $10,000) = 28%

As you can see, simply by signing up for a new credit card, the credit utilization ratio fell below the 30% threshold that you need to maintain to get a good credit score. If you want to get an even better credit score, though, experts recommend shooting to keep your credit utilization ratio around 10%.

Length of Credit History (15%)

Another factor that contributes to your credit score, although less significantly than your payment history or credit utilization ratio, is your average length of credit history. For instance, if you have three credit accounts which are 10 years old, four years old and seven years old, then your average length of credit history would be seven years old (the average age of all three accounts). 

In order to have an excellent credit score, you need to have an average length of credit history of at least seven years. 

If you were to sign up for a credit card in the example above, it would actually decrease your average length of credit history to slightly over five years, which would then be under the required threshold for an excellent credit score. So, in this case, signing up for a new credit card would hurt your credit score. 

On the other hand, if you don’t have any credit at all yet, then you’ll want to sign up for a credit card as soon as possible. That way you can reach that seven-year threshold sooner. 

Credit Mix (10%)

One minor factor in determining your credit score is your credit mix, which is how many different types of credit you have. Different types of credit include but aren’t limited to: 

• Credit cards
• Mortgages
• Auto loans
• Student loans
• Personal loans

The more types of credit that you have, the better your credit mix is considered to be and, therefore, the better your credit score will be. Thus, for example, if you already have a mortgage but no credit card, adding a credit card to the mix will help your credit score.

New Accounts (10%)

Another minor factor in your credit score is the number of new accounts that you have. The more new accounts that you have, the greater negative effect it’s going to have on your credit score. That’s because opening new credit accounts involves a hard inquiry (which is essentially when the lender does a deep dive into your credit history). 

Hard inquiries will typically drop your credit score a few points. Luckily, hard inquiries also typically disappear from your credit report in about one year, at which point your score will go back up. The longest a hard inquiry will stay on your credit report is two years. 

So, if you sign up for a credit card, it will have an immediate negative effect on your credit score of a few points. However, you’ll regain those points after about one year on average. 

Tracking Expenses

Another advantage of credit cards over debit cards is that credit cards make it far easier to track your expenses (you can even track them by category). By contrast, if you make a lot of purchases in cash, it’s going to be nearly impossible to remember every purchase you made. And, if you use a debit card, you may be able to easily find the amount of money you spent in a month, but your purchases may not be broken down into categories the way they are with credit card accounts. 

Today, almost every credit account allows you to see your purchases broken down into categories such as dining, entertainment, gas stations, groceries, health, home, professional services and more. Having these sorts of insights into your spending habits can help you get a better hold on your finances. 

For instance, by looking at the expense categories that you spend the most in, you may be able to find places where you can reduce your spending and have some money to contribute to your savings at the end of each month.

When to Use a Debit Card 

While responsible credit card users should use their credit card for nearly every purchase, there are a few instances in which it’s better to use a debit card. 

When you use a credit card with a merchant, that merchant is required to pay a processing fee to American Express, Discover, Mastercard or Visa (depending on the type of credit card you have). For example, if you pay for a $10 sandwich with your American Express® Gold Card, the merchant will most likely be paying a fee of around $0.30 or so. While this doesn’t sound like a big deal when paying for a $10 sandwich, it can be a significant amount of money if you’re making a multi-thousand-dollar purchase.

So, in a scenario where you want to help the merchant out in avoiding that fee (perhaps you want to support a small business or a friend-owned business), then you can do so by using a debit card instead of a credit card.

Additionally, sometimes merchants will pass that processing fee along to customers by asking them to pay a “credit card fee” or a “convenience fee” or something like that. In this case, it may be better to use your debit card and avoid paying this fee. 

The Bottom Line

Most of the time, the smartest move for financially responsible people is to use a credit card for every purchase. Of course, if you have trouble controlling your spending and you’re worried about getting yourself into debt, then you should probably stick to spending on your debit card. However, if you’re able to use a credit card responsibly, credit cards offer many advantages over debit cards. 

Credit cards have much more extensive fraud protection than debit cards, making it a safer decision to carry a credit card than a debit card. Also, any spending that occurs on your credit card account will automatically be recorded and categorized, making it easy to track your spending and get ahold of your finances. The same can’t be said for debit cards. 

More importantly, though, using a credit card can help you build a good credit score, which is extremely important for getting good mortgage rates, getting good auto loan rates, getting approved for housing rentals and sometimes even getting a job. 

Finally, credit cards offer rewards and benefits that you can’t find with debit cards. From rewards points to airport lounge access to statement credits and more, these features can save you money and dramatically improve aspects of your life.