Updated 5/30/2024

In the personal finance community, there are passionate discussions about every financial topic you could imagine. And as you might anticipate, some of them can get pretty feisty – well, one of those debates is about credit vs. debit cards.

Credit cards have a ton of perks as you might know, but there are also many debit card advantages and disadvantages.

Let’s discuss aspects of each so you can make the right decision for you.

Key Takeaways:

• Debit Cards vs. Credit Cards – Depends on the Person!
• Credit Card Rewards Can Be Significant but Easily Wiped Out with Interest
• Debit Cards Help Teach Spending Responsibility
• Debit Cards are Like Bowling with Guard Rails – You Don’t Look Cool but You Don’t Ever Get a Gutter Ball

In this post, I’m going to cover the following major topics:

• What is a Debit Card?
• What is a Credit Card?
• Debit Card Advantages
• Debit Card Disadvantages
• Does it Cost to Have a debit card?
• Credit Card vs. Debit Card

What Is a Debit Card?

A debit card is a card given to you by your bank. It pulls money directly out of your checking account. In essence, it’s like a virtual check. You swipe your card, enter your PIN, and the money will come straight out of your checking account.

With a debit card, there is no waiting between making a purchase and money being removed from your account. There also is no middleman facilitating the transaction.

What Is a Credit Card?

This is different from using a credit card. When you use a credit card, you’re borrowing on a line of credit, as the name of the card suggests. Then, you have to pay back the amount that you borrowed to avoid paying interest.

With a credit card, your credit card company acts as a middleman letting you borrow enough money to make the purchase, expecting you to pay them back.

On a debit card, because you’re using it to pull money directly out of your account, you’re not borrowing money from anyone, so you don’t have to worry about interest.

This may seem like a clearcut victory, but this is a nuanced comparison. Let’s dive in.

Debit Card Advantages

You Only Spend What’s In Your Account

One of the major advantages of a debit card is that you’re only spending what is in your account. Truthfully, I think this is far and away the biggest advantage.

By never borrowing any funds, you’re eliminating the potential to spend more money than you have. That’s oftentimes how people will get themselves in a lot of trouble with credit cards because they’re overextending themselves and spending more than they can afford.

Then they find themselves stuck paying interest at a rate of 20%+ and not ever being able to get out of the hole, all because they started by spending too much.

With a debit card, you spend what you have, and if you don’t, you can’t spend it – plain and simple.

For someone who struggles with financial discipline, this can be an amazing option to prevent overspending.

Easy to Aquire

Another advantage is that debit cards are easy to acquire. Because you’re not applying for credit, there is no impact on your credit score, and you can open one with your bank. Now, it will take some time for the bank to create a card and send it to you, but it’s a much simpler process than filling out an application like you would with a credit card.

You Can Use It Anywhere

Finally, the last major advantage is that you can use it anywhere. Some credit cards, like American Express, aren’t accepted by some vendors because of the fees they charge. With a debit card, this will not be the case.

If you’re going, “Andy, most large places will accept American Express”, then I would agree most of the time, but not always! I go shopping at Aldi for my protein and fresh produce because it’s much cheaper (and better quality) than some other grocery stores near me, and they don’t accept American Express. Pretty messed up, right?

With a debit card, you don’t have to fear this. Your card will always be accepted because it’s effectively straight cash coming out of your account, so there is no middleman to charge a fee.

No Payments

Since a debit card pulls directly from your bank account, there are no monthly payments to be made like with a credit card. This makes debit cards far simpler and less stressful to manage.

Debit Card Disadvantages

Missing Out on Rewards

The largest disadvantage to me is the reward points you miss compared to a credit card.

There are so many different types of credit cards with great rewards that you can make quite a significant amount of money by simply matching credit card rewards to your needs. For starters, I like to search for the best credit cards and usually end up on Nerdwallet.com. They have great summaries of current best overall cards and best cards for specific uses (i.e. groceries, gas, restaurants, etc.).

When I did that, I found multiple cards that offer cash back of 2%+ on every dollar spent. That’s amazing!

Just think—if you were to spend $2000/month on your debit card and switch that money to a credit card that’s earning you 2%, you’d be looking at $40/month or $480/year!

That’s not an insignificant amount of money for essentially doing the exact same thing as you would with a debit card.

For a specific example, let’s take the first credit card that is listed in the Nerdwallet article, the Chase Freedom Unlimited card:

With this card you get:

• 4.5% cash back on drugstore
• 3% on all purchases
• 1.5% on all purchases up to $20K in the first year
• No Annual Fee

With a debit card you don’t get any of these benefits. but, how exactly does this impact you financially? In just one year, you would have saved over $1K if you spent $2K on your credit card:

Pretty incredible, isn’t it?

Credit card rewards are unbeatable when it comes to cashback. However, if you’re not going to be able to pay off your card in full each month, then you’re quickly going to erode any benefits that you’d receive by using a credit card.

You Can Only Spend What’s In Your Account

Another disadvantage (that yes I also listed as an advantage) is that you can only spend what is in your account. Now, there is an obvious benefit to the fact that this is going to help keep you from going into consumer debt, but this also can be a very big disadvantage if you’re savvy with your personal finances.

For example, let me explain how I use my credit card. After I’m paid, I will allocate my money to the various funnels. This includes my savings/investing, setting aside money for upcoming bills, and then paying off my credit card balance.

For the next two weeks, until I am paid again, I will spend on my credit card. My checking account will hover around $500 (as a buffer) + my fixed monthly expenses (rent, insurance, utilities, etc.) until my next paycheck. I won’t keep any money in my checking account for whatever I spend on my credit card but rather just let the balance grow.

Then, when I’m paid again, I will pay off my credit card, put some money away for savings or investing, keep enough in my checking account for a $500 buffer + other fixed expenses, and rinse and repeat.

I will do this because I know from years of budgeting with Doctor Budget that I don’t need to worry about overextending myself. Typically, I know how much I can spend and don’t ever come close to going over that balance unless I have an emergency, in which case I will simply use my emergency fund.

I am comfortable running my balance down to $0 because, as I mentioned, I am very confident in knowing my financial situation like the back of my hand. This confidence wasn’t natural for me, as I have made many, many financial mistakes, but they have motivated me to learn and get to where I am now.

If you lack spending discipline, this strategy is not for you. But I like this strategy because I can spend without worrying about overspending my account. This is nice because if you overspend your account, you’ll incur an overdraft fee.

Many banks, especially the brick & mortar banks that are more “traditional”, are going to charge you an overdraft fee if you try to make a purchase that’s larger than the money in your account, and these overdraft fees can be quite hefty!

Can you imagine paying $35+ for trying to make a purchase that you don’t even get to make? Let me say this again…

If you have $100.00 in your account and something costs $100.01, you will not be able to make the purchase, and you will have to pay $35+ simply to try to make that purchase.

Nothing like a poor tax, right? That’s brutal!

There are some newer banks that offer debit cards that don’t have an overdraft fee but they’re typically newer, online banks.

At the end of the day, if you’re not going to overspend what you have, then this is a moot point. But even for the most savvy personal finance expert, sometimes things will slip the back of their mind and you will get hit with one of these “nice” reminders…the $35 variety.

Does It Cost to Have a Debit Card?

Nope! Debit cards are almost always free to the account holder. Now, there are some fees you’ll likely encounter if you use the ATM somewhere different than your bank, but the actual cost of the debit card is $0. Just make sure to avoid overdrafts!

Debit Card vs. Credit Card

“Ok, Andy, I stumbled through this entire blog post, but I really just want to know which one is better for me.”

Fair enough – let’s get down to brass tax.

In one sentence, I think that credit cards are for financially disciplined people, and debit cards are for those who need some guardrails for their spending.

As I’ve shown above, there are inevitably great monetary advantages to using a credit card, but if you end up spending more than you can afford to pay off, you’ll be stuck paying a 20%+ interest rate. Not only that, but you will have spent more than you intended to, meaning that you’re losing more than you even spent!

Personally, I use the American Express Blue Cash Preferred card for all of my purchases:

I love this card because my highest discretionary spending, by far, is at the grocery store and now in my car when gas prices are hitting nearly $5/gallon in the Midwest. I recently upgraded to this card from the Blue Cash Everyday card because the benefits are just too good to pass up.

Now I will have to pay the $95 fee each year, but by getting 6% at supermarkets instead of 3% on $6K in purchases, that will make me $180 every year, so I’m already coming out ahead.

Normally, I wouldn’t open a credit card for just $100/year, but since I already had an AmEx, it allowed me to upgrade without applying and showing a hit to my credit report.

Again, I like this because I feel confident in my spending restraint. If you don’t, use a debit card.

I used a debit card for years and years before I was comfortable opening a credit card, and once I did open a credit card, I maxed that thing out, realized I made a mistake and went back to my debit card.

Both cards have major pros and cons, but the end goal is the same—maximize the amount of money that stays in your pocket. And why do we like to do that? So we can invest in some great companies with the Sather Research eLetter, of course!