Whether you just got a credit card or you’ve been swiping plastic since you can remember, there’s a strong possibility that you’re using your credit card wrong. Okay, let’s slow down. Finance management certainly depends on personal preference and your own unique needs, but there are a few differences between how credit and debit transactions are processed that consumers should know about. In this post, we’re discussing how credit and debit cards work, and how to know which to use when you’re preparing to pay at the register.

What happens when you use a credit card…

A credit card is a convenient thing to have (if you’re using it responsibly, of course). You can borrow money to cover expenses, access rewards, and develop credit history to improve your credit report. But before swiping funds into infinity, let’s talk about what actually happens when you use your credit card to make a purchase.

When you select credit, the merchant will most often need your signature in order to authorize the transaction, which your credit card company can deny if you’ve exceeded your credit limit. Once the transaction has been approved by the credit card company and authorized by you, then the merchant will either charge the funds to your account immediately or they’ll process all of their credit transactions at the end of the day. In the latter scenario, you might see this charge as “pending” on your credit card statement. The amount you spent on that transaction will then show up on your credit card bill and be subject to additional fees and interest rates from your credit card company.

What happens when you use a debit card…

You can essentially think of your debit card as a cash transaction, you just need to enter your PIN to access the funds within your account. This means your bank can decline a transaction when your account balance falls short of the amount due at your point of purchase. After the transaction is approved, the funds are deducted from your account and transferred to the seller, oftentimes automatically with an ACH payment

Depending on your agreement with your bank, you may see a transaction fee processed on your statement when you run a debit card payment. Check with your bank to see what fees, if any, they charge you when completing a purchase with your debit card.

How to choose credit or debit

Now that you know how credit and debit cards work, let’s discuss how to choose which one to use when you’re making a purchase.

Use a debit card when…

  • You’re watching your budget: Credit cards have a tendency to complicate your finances. You pay interest on transactions, build up a balance, and if you’re not careful, you may end up with credit card debt that’s hard to recover from. If you’re trying to pay down debt and improve your credit score, it may be a good idea to use your debit card in the meantime. This way, you won’t exceed your funds and you won’t have to pay extra fees on daily transactions, which could make it easier to manage any existing debt.
  • You need cash: If you need to withdraw cash from an ATM, a debit card will allow you to do so at a lower rate than getting cash out with your credit card. Same thing goes for getting cash back at the register.
  • Shopping at a small business: Credit card companies charge businesses fees whenever a transaction is processed at their establishment. Business Insider reports that credit card transactions cost small businesses 3% more than debit transactions, which can translate to higher prices and less marketplace opportunity for small businesses. Show your support for your community and keep prices affordable by using your debit card when shopping small!

Use a credit card when…

  •  Shopping online: The FTC says credit cards are a safer choice when shopping online in case your information is subject to credit card fraud. The law states that your loss is limited to $50 if you report unauthorized charges right away. Additionally, travelers may want to use credit cards while on vacation to protect themselves from fraud—just beware of foreign transaction fees!
  • Making a big purchase: If you’re making a big purchase like investing in a new computer or booking travel accommodations, your credit card company may offer an extended warranty for your purchase. In fact, extended warranties are one of the most common benefits for credit card users. The coverage varies depending on your credit card company, but could guarantee returns or help cover the costs of product replacements if there are manufacturing issues or if you’re a victim of theft.
  • You get rewards: Many credit card companies offer rewards programs that give customers cash back, discounts, and other benefits when they make purchases at certain locations. For example, a rewards program may offer cash back at grocery and home improvement stores for a few months. In this case, you may want to use your credit card at these establishments to earn cash back on your account.


No more mindless swiping! Next time you make an online purchase or buy something from a local business, use these tips to help you decide whether to select debit or credit.

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