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When you spend your hard-earned money, you have a few options of how to complete those transactions. You could choose to pay cash, use your debit card, or use a credit card. What is the difference between debit and credit, should you ever use cash, and why does your debit card give you the option to pay as credit? Get the answers to all these questions below

Differences between debit and credit

A debit transaction is made with a debit card and occurs when you enter your pin number after swiping or inserting your card. The funds are immediately taken from your checking account through an electronic funds transfer. This is the closest you get to paying by cash with a card.

A credit transaction is made with a debit card or credit card. You must sign to complete the transaction. The transaction is then sent out for processing through a major credit card company, like VISA. The money is not removed from your checking account or added to your credit card bill right away, it often takes a day or two.

When to use your debit card as debit

THE SELLER NEEDS THE TRANSACTION COMPLETED IMMEDIATELY.

Because there’s no delay in funds being processed when using debit, the other party can receive your payment faster.

YOU WANT TO HELP LESSEN A SMALL BUSINESS’ FEES.

Merchants pay extra fees to have payments processed by a large credit card company. This is why some small businesses may not accept credit, and why they often have minimum purchase amounts if they do. You can decrease the fees they pay if you complete a debit transaction rather than a credit transaction.

YOU WANT THE BEST EXCHANGE RATE ON FOREIGN CURRENCY.

You’ll get more currency to the U.S. dollar if you choose to use your debit card to access money overseas. If you need to get foreign currency for a trip, wait until you’re in the country and then use your debit card at an ATM to withdrawal the funds you need.

YOU’RE STRUGGLING WITH MONEY MANAGEMENT OR CREDIT CARD DEBT.

If the choice is between a debit card and a credit card, it could be smart to use debit if you’re struggling financially. You need to pay off a credit card each month so you aren’t increasing your balance through high-interest rates. Use a debit card if you’re working on fixing those bad habits.

WHEN TO USE YOUR DEBIT CARD AS CREDIT

There are many situations where it is smarter to choose credit at checkout than debit. Here are those situations.

YOU WANT ADDITIONAL FRAUD PROTECTION.

Choosing credit not only means that the transaction will be delayed, but it means that you will be protected from fraud by not just your financial institution, but also the credit card issuer.

YOU WANT TO BUY SOMETHING ONLINE.

We recommend ONLY using credit while shopping online, and you’ll get even better protection by using a credit card. Let’s say you buy a swimsuit off of Amazon, but when it gets to you, it looks nothing like the picture. If you bought it with debit, you’re at the mercy of whether the seller decides to refund your money. If you bought it with credit, you can dispute the charge with the credit company and not pay a cent out of your bank account while they resolve the issue.

YOU’RE TRAVELING ABROAD.

We recommend using a credit card while traveling abroad if you want to make a basic transaction at a shop, not an ATM. The protection from the credit card company will make the transaction safer. Just make sure to notify your financial institution and/or the credit card company to let them know you’ll be traveling.

YOU WANT TO MAKE A LARGE PURCHASE.

Swiping as credit gives you better fraud protection, and you’ll need it with a large purchase.

YOU WANT TO IMPROVE YOUR CREDIT SCORE.

While swiping a debit card as credit won’t necessarily improve your score, using an actual credit card will. Read our guide “How to Use a Credit Card to Improve your Credit Score” here.

YOU’RE LOOKING FOR BENEFITS LIKE POINTS OR CASH BACK.

Financial institutions and credit card companies will often offer extra benefits like points or cash back for credit card transactions. They can afford this because they make more money off of credit card transactions than a debit card transaction.

Business Insider created this helpful table to show when it’s appropriate to use either cash, debit or credit.

Credit vs debit transaction

Source: Business Insider |Anaele Pelisson

Which do we recommend? In most situations, we recommend choosing credit or using a credit card. The extra fraud protection outweighs most debit benefits, in our opinion. The best thing to do is to keep both a debit card and credit card in your wallet so that you have all payment options at your disposal. Now go spend that hard-earned money!

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