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When Should You Use Credit? A Guide to Making the Right Choice

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It might come up whether a credit card or debit card is the best way to pay if you don’t have cash on hand.

You can use both a debit card and a credit card, or you can just use the plastic card that is closest to you at the time. Both a credit card and a debit card get the job done when shopping or paying bills. But did you know that these two types of cards couldnt be more different when it comes to fraud protection and other key factors?.

When you use a debit card, funds are often drawn from your checking account or another linked account that same day. When you use a credit card, you borrow money from the company that gave you the card and add to your balance, which you can either pay off every month or keep and pay interest on. Those arent the only important differences, however.

Here are five things to know about when to use your credit card vs. a debit card.

Debit cards and credit cards both often offer fraud liability protection. But there is a major difference in the amount you could be liable for if someone uses your card for fraudulent transactions. With a credit card, youre typically responsible for up to $50 of unauthorized transactions or $0 if you report the loss before the credit card is used.

You could be liable for much more for unauthorized transactions on your debit card. If you report the debit card as lost or stolen within two days, you’re typically responsible for up to $50. If you wait longer than two days to report the card as lost or stolen, your liability could be as high as $500–or even the full amount if you wait longer than 60 days.

If youre trying to build a credit history or improve your credit, charging even a small amount on your credit card each month can have a positive impact on your credit score, provided you make timely payments or pay off the statement balance each month. Using your debit card wont affect your credit history, since the transaction is simply a withdrawal from your checking account, not a credit transaction.

Every time you use your credit card, youre adding to the cards balance. If you pay off the balance each month, thats not a problem. However, if your balance is already high and you want to pay it down, paying the bills and everyday expenses with your debit card for a while can help get your credit card balance down to a manageable amount.

When you need cash from an ATM, youre probably better off using your debit card to withdraw funds, even if you must pay an ATM fee. Most credit card issuers charge a cash advance fee, typically a flat fee of $10 or 5% of the transaction, whichever is higher, according to creditcards.com. On top of the cash advance fee, youll usually pay a higher interest rate on the cash advance amount, an average APR of 24.80%, according to creditcards.com.

If you are traveling, you may be staying at a hotel. Most hotels require a credit card or debit card for a deposit on room rates, taxes and incidentals when you check in. Both types of cards return the deposit after you check out, but you’re better off using your credit card in this scenario.

Thats because the hotel will charge your debit card for that deposit immediately, withdrawing funds from your checking account and decreasing the amount of money you have available. When you use a credit card, the deposit is simply a hold on your cards available funds.

Now that you know when it might be best to use a debit card or credit card, plan for when youll use each card. While youre at it, set a goal for building an emergency savings so youll have cash available for emergency expenses and wont have to charge them to your credit card.

Credit cards and loans can be extremely useful financial tools when used wisely. But when is it appropriate to use credit versus cash or debit? This comprehensive guide covers the pros, cons and best uses of credit so you can make informed decisions.

The Advantages of Using Credit

There are several key benefits to using credit responsibly

  • Convenience. Credit cards let you buy things without carrying cash when you shop in person, online, or over the phone. You can also rent cars, book hotels and more.

  • Emergencies. When you don’t have the cash on hand, credit can help you pay for things like medical bills, home repairs, or car repairs that come up out of the blue.

  • Building credit. Using a credit card and paying it off regularly helps establish good credit. This makes it easier to get loans, mortgages, lower interest rates and approval for rentals.

  • Rewards. Lots of credit cards give you cash back, points, or miles that you can exchange for gift cards, vacations, or credits on your bill.

  • Purchase protection. Credit cards offer longer warranties, protect you from damage and theft, and let you dispute charges that don’t make sense. Debit cards offer limited protections.

  • Float. When you pay with a credit card you have until the due date to pay it off interest-free. This gives you more time to have the cash in your account.

The Downsides of Credit

Credit can be harmful when used irresponsibly:

  • Interest charges. If you carry a balance and don’t pay in full each month, interest charges add up quickly. This gets very expensive.

  • Fees. Late fees, annual fees and cash advance fees can accrue. Make sure to avoid these.

  • Overspending. It’s easy to overspend with credit since you don’t have to pay right away. Avoid charging more than you can afford.

  • Impulse buys. Credit cards don’t feel like real money, so it’s easier to make impulse purchases. Always think before charging a big purchase.

  • Debt traps. Carrying a balance can lead to a cycle of debt that’s tough to get out of. Pay off cards in full each month.

  • Hurt credit. Late/missing payments or having too much debt relative to your limit hurts your credit score.

When Should You Use Credit?

Now that you know the pros and cons, here is a guide to the best uses for credit:

Everyday Purchases

  • Paying bills – Use credit cards for regular expenses like utilities, subscriptions and insurance if you’ll earn rewards and can pay it off each month. Avoid using credit for bills if you’ll carry a balance.

  • Groceries & gas – Charge these on a rewards credit card if you’ll quickly pay it off. Don’t use credit if it will take a long time to pay off.

  • Dining out & entertainment – Okay for special occasions if you immediately pay it off. Avoid if carrying debt.

  • Online shopping – Credit cards are safer than debit for online purchases. Just make sure you have the funds to pay it off quickly.

  • Medical expenses – Use credit if you need to pay expenses over time and can’t afford it all at once. Compare financing options carefully first.

Major Purchases

  • Appliances & electronics – Credit cards can make sense for large, planned expenses because of purchase protection and rewards. Only use them if you will pay it off quickly.

  • Furniture & home renovations– Financing options are available, but avoid paying excessive interest. Save up first if possible, or choose a credit card with an intro 0% APR period.

  • Vehicles – Look for low APR financing through the dealer. Compare options carefully, as loan rates are usually lower.

Travel & Entertainment

  • Airfare & hotels – Pay with a travel rewards credit card, but only if you’ll pay off the balance that month.

  • Car rentals – Credit cards are required by most rental agencies. You may also get rental car insurance.

  • Concerts, movies & events – Okay for a special occasion. But don’t overspend on entertainment you can’t immediately pay off.

Emergencies

  • Medical bills – If you don’t have savings, cards can help spread out expenses. Compare financing options and try to pay off as quickly as possible.

  • Home or car repairs – Avoid predatory financing. Use a low-rate credit card or personal loan if you need help covering big unexpected repairs.

  • Job loss – While credit may help temporarily, it’s risky. Reduce expenses and tap emergency funds if possible. Apply for unemployment and other assistance.

Bottom Line

Credit is a useful financial tool when used wisely for planned purchases and unavoidable emergencies. But make sure to always compare interest rates, fees and terms. Avoid credit when possible for everyday expenses by spending only what your budget allows. The safest approach is to charge only what you can immediately pay off in full.

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This article is based on information available in February 2022. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.

How to Use Credit Cards Wisely | The 6 Golden Rules

FAQ

When should you use your credit card?

For unexpected expenses. If emergencies such as medical bills, car maintenance, or home repairs come up, a credit card can serve as a temporary loan (and an interest-free loan at that, as long as you pay off the balance before the next payment cycle).

When should a person begin using credit?

It’s not possible to get your average credit age up faster, but you can make it easier on yourself by getting a good starter credit card when you’re 18. This will probably be either a secured credit card, a college student credit card (if you’re in college) or a credit-building credit card.

When should I use credit instead of debit?

When to use your credit vs. debit card: 5 things to knowCredit cards often offer better fraud protection. Using a credit card can help build good credit. Paying with a debit card can help manage credit card debt. Use your debit card for ATM withdrawals. Use a credit card for hotel deposits.

What is the 2/3/4 rule for credit cards?

The 2/3/4 rule is a credit card application restriction specifically used by Bank of America. It limits the number of new credit cards you can be approved for within certain timeframes.

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