Credit vs. debit cards: Empowered shoppers know the difference — and when to use each

It is the annoying lag in any otherwise seamless cash-free purchase: You swipe your card, you OK the amount — and then the card reader wants to know if you're paying with a debit card or a credit card.

Who cares? I'm paying, right? What does it matter if it is a credit or a debit card?

It actually matters a lot — not just for the retailer, but also for you. 

If you carry a debit card and a couple credit cards and perhaps use them interchangeably, it is important to know the difference. There are times to use credit and time to use debit.

One major difference, besides how your money gets delivered to the retailer, is that using a credit card helps you build a credit history and — depending on the type of card — may net you some reward points. That's helpful for people who manage their credit and qualify for rewards cards. 

But for those looking to control their spending and avoid black marks on their credit report, debit cards can be a safer choice.

And that's not where the differences end.

Here's our breakdown on how to savvily and safely get the most out of your debit and credit cards.

Debit card vs. credit card: What is the main difference?

Here's the main difference between a debit card and a credit card. 

A debit card pulls your money directly out of your bank account to pay a retailer. It's like writing a check, but faster — the money for the purchase comes out of the account almost immediately.

A credit card allows you to borrow the money from a bank to make a purchase. The money isn't coming from your bank account to pay for the purchase; you're borrowing it to purchase the item, and receiving a monthly bill for use of the bank's credit.

When should you use a debit card instead of a credit card?

With a debit card, you have access only to the money that's in your bank account. For this reason, many people prefer using debit cards as a simple way to keep track of and manage their spending. 

You are not borrowing anything, you are not overextending yourself and once the purchase is made, it is simply bought and paid for — there's no bill to settle.

When you make purchases this way, you're not paying anyone to use the money or to extend you credit. In this way, a debit card offers the "free use of money." 

It is impossible to go into debt with a debit card because you will hit the limit of your funds and the purchase will bounce back with "insufficient funds." The ultimate reality check.

But it is possible to rack up fees.

It used to be that some banks would extend an automatic courtesy buffer zone so that if you went over a little bit, the purchase would still go through and the bank would charge an "overdraft fee." The FDIC did a study that found these overdraft fees ranged from $10 to $38, with a median average of $27 per transaction. 

This is not free money; the banks were raking in the overdraft fees.

In 2010, new regulations come into effect which protect consumers when their debit accounts are overdrawn. Now, institutions must confirm that account holders wish to opt in to these overdraft programs, so there are no more surprise fees.

If you opt for overdraft protection, you need to watch your account balance(s) to be sure you don't overspend. 

After all, banks are still making millions from users' inattentiveness to their account balances and ATM fees.

When should you use a credit card instead of a debit card?

What makes debit cards so appealing — the ability to limit your spending to what you have available — also makes them dangerous. Because if you can spend only what you have, so could anyone else who has that card. And they're likely to spend all of what you have.

The differences between a stolen credit card and a stolen debit card are significant.

Spot an unauthorized charges on your credit card bill? You can alert the company, call foul on the charges and not pay the bill, keeping your money. When funny-stuff happens on your debit card, your money instantly disappears from your checking account — and it's tough to get it back.

The consumer protections in place for credit card fraud are stronger and more comprehensive than for debit card fraud.

If someone filches your credit card and runs up fraudulent purchases, you may be on the hook for $50 tops thanks to a consumer protection enacted as part of the Fair Credit Billing Act. 

By reporting the loss of the card before any charges can be made, a cardholder cannot be held responsible for any unauthorized charges made on the stolen card, according to the FCBA. Further, if someone swipes your card number, but not the card, you are not liable for unauthorized use.

On the other hand, if someone steals your debit card, you're going to potentially be in much worse shape. 

Because the debit card links directly to your account with money you've already earned, the thief could clean you out and gain access to your bank account.

Your bank may have fraud protections in place, but not all banks do, and it is unlikely to be as generous as the credit card consumer protections. 

The Electronic Fund Transfer Act is another consumer protection put in place to protect you from fraudulent actions on your ATM and debit cards. But your exposure depends on how quickly you call it.

If you report the loss before any unauthorized charges are made, you have no liability. If you report the loss within two days of learning about the loss or theft, you're on the hook for $50 worth of losses. 

But if it's reported between 2 and 60 days after the loss, then you're liable for up to $500 in losses. After 60 days, the losses, which could include all the money taken from your debit card account and any accounts (like a savings account) linked to your debit account, are all on you.

That's dire.

This is why you should never let your debit card out of your sight. 

So, if you're at a restaurant where the waiter takes the card for the bill? Give a credit card instead. 

Using a card reader on a vending machine or gas pump that sees a lot of traffic? Use your credit card. These machines can have "skimmers" — devices that copy your card data — on them.

Other places you shouldn't use your debit card: online retailers, outdoor ATMs.

Keep your debit card with you, use it at stores where you can monitor the swipe and transaction and be proactive the moment you learn of any security breach from a retailer.