If you are like me, you have a lot of plastic in your wallet—namely, at least one debit card and one credit card. Just to make sure that we are all on the same page when it comes to the lingo, let me go over what I mean by the terms “debit card” and “credit card.” A debit card is issued by a bank and allows the cardholder to access the funds in their bank account to withdraw cash at an ATM or pay for items. A debit card, unlike a credit card, does not increase your debt. Credit cards can be considered a form of a loan. When you use a credit card to make a purchase, the financial institution that issued the card essentially fronts you the funds to make the purchase—funds which you are then expected to pay back.

Though it used to never cross my mind that I can use my cards more strategically, I’ve learned that there the are instances when either a credit or debit card is a better choice for a particular purchase. Here are which purchases are best to use with each type of card:

When to Use Credit Cards

  • Online shopping: If you are making purchases online, it is safer to use a credit card than a debit card. Most credit card companies have zero liability policies, which means if fraudulent charges are made on your credit card, you will not be responsible for paying any of those charges (provided you report the fraud within a specific time frame). On the other hand, debit card transactions are like using cash—once the money is spent (even fraudulently), it is gone forever. While some banks may offer some debit card fraud protection programs, they are generally not as protective as the ones offered by credit card companies. Credit cards are also typically safer for online shopping since credit card companies have more extensive fraud detection services than debit card services.
  • Travel: When traveling away from home, it is typically safer to use your credit card because as discussed above—credit card companies are more vigilant about detecting fraud and they won’t put you on the hook for fraudulent charges. Also, using a credit card while you travel may give you extra travel perks such as rental car upgrades, frequent flier miles or a percentage cash back on purchases. Additionally, there are some airlines, hotels, and travel sites that will only accept credit cards for purchase. If they do accept debit cards, they may put a hold on your account which can tie the funds in your bank account. For example, at some hotels, this hold—which may be in the amount of the room rental rate multiplied by the number of nights you plan to stay plus extra for incidentals—may be placed on your account right when you check in and may not be released for several days after you check out since the hotel accounting department must first release the hold and then the bank in the card-processing chain must remove the hold. If you only have $700 in your bank account, and the hotel puts a $600 hold on your debit card—when you go to buy that $150 paragliding tour package, your card will be declined due to insufficient funds.
  • Restaurants: Think about it—restaurants are one of the only places that you let your credit or debit card go out of your sight. A waiter may pick up your card from your table and then you might not get it back for 10 or so minutes, giving plenty of opportunity for scammers to copy down your card number and then use it to make fraudulent charges. As already mentioned, credit card companies give you better fraud protection than debit cards, so you are more protected when you use a credit card.
  • When a deposit is required: It is better to use a credit card in cases where a deposit is required—for example, when the hardware store charges you a $100 deposit to rent their pressure washer. If you used your debit card here, the store would put a hold of $100 on your account—making the funds unavailable to you, which could lead to insufficient funds or overdrafting your account.
  • When making big purchases or buying large items, appliances, and electronics: If you use your credit card for the transaction, many credit card companies will offer you additional warranty protection (that goes beyond the manufacturer’s warranty) for the item you are purchasing. Check with your credit card company to find out their specific policy. Typically, American Express has the most generous plan: items purchased with your AmEx automatically get a free year-long warranty extension beyond the manufacture’s warranty. Visa Signature cards offer this same perk. MasterCards will only extend the warranty up to a year if the manufacturer doesn’t offer a year of protection. Discover cards do not offer free warranty extensions.
  • When you want to build your credit history and improve your credit score: If you are financially responsible, use a credit card for purchases and then pay off your balance every month on time. Over time, this will build up your credit history and increase your credit score.

When to Use Debit Cards

  • When shopping at small businesses: When you use your credit card at a store, the credit card company charges the store a small fee for the transaction (usually about 2% of the value of the sale). So, if you want to buy $1.50 worth of gummy worms from the Smalltown Sweet Shop (a family-owned, small business in your town) and don’t have cash, use your debit card for the purchase so the store owners don’t have to cut into their profits by paying the credit card company a fee from the sale. Debit card companies do not charge merchants a fee for each debit card transaction.
  • When the other party needs immediate payment: If the other party needs the funds immediately after you make the purchase, use your debit card since the electronic transaction happens almost instantaneously after the purchase. Credit cards, on the other hand, can have a lag of several days.
  • When you want the best exchange rate on foreign currency when traveling abroad: When you’re traveling internationally and need cash in the currency of the foreign country you’re in, use your debit card to withdraw cash from an ATM in that country (but first make sure the ATM is legitimate, such as an ATM attached to a major bank chain). The cash you withdraw from the ATM will get the wholesale exchange rate (a rate used for just interbank purposes), which will be a more favorable exchange rate than the exchange rate applied to your account when you use your credit card in that foreign country.
  • When you are on a budget and tend to spend beyond your means on credit cards: Unlike credit cards, you can’t spend more money on your debit card than you actually have in your bank account (provided you set your bank account/debit card to not allow overdrafting).

Note: This article assumes that you are able to use credit cards in a responsible way. If you can’t use credit cards responsibly, it is best to not use them at all.

When to Use Credit Cards vs. Debit Cards