Though they’re both made of plastic and can be used for payments, credit cards and debit cards have a number of important differences. When should you use one or the other, and what are the benefits and drawbacks for each? Read on to learn more.

Credit Card and Debit Card Basics

Since a debit card is connected to your bank account, the amount of money you can charge to it depends on transaction limits and your account balance. With a credit card, on the other hand, you can charge up to your credit limit, which is a predetermined amount based on factors like your credit score and annual income. It could be more than the amount of money you have on hand at any given time.

Each month, you’ll receive a credit card statement that lists the full amount of the purchases you’ve made during the statement period. If you don’t pay off the full balance listed by the end of that statement cycle, you are “carrying a balance” of debt. The interest rate of your credit card is a number that represents the amount of interest you’ll pay each year on that debt.

A credit card’s annual fee is the amount your card issuer will charge you each year, regardless of how you use your credit card. If the annual fee is $0, and you have a grace period, it’s possible to never pay anything more than what you charge to your card. You just need to pay your balance in full each statement cycle so you aren’t charged interest. Most debit cards don’t have annual fees, though they may be tied to checking accounts with monthly fees.

Open a Checking Account With No Monthly Fees

Getting Cash From ATMs

Debit cards are designed to get cash from a variety of ATMs with a small fee or even no fee when used inside certain ATM networks. But credit cards treat an ATM withdrawal as a “cash advance.” This type of credit card charge can come with one-time fees and a higher interest rate that begins accruing immediately – meaning you’ll end up paying more than the value of the cash you withdrew to pay off your credit card bill.

Building Credit

One of the biggest advantages of using a credit card over a debit card is that a credit card can help build your credit score – when used responsibly. By paying your balance each month and keeping your overall credit utilization (the percentage of your credit limit that you use each statement cycle) low, you can improve your credit score to make future credit offers – like a house mortgage or car loan – more appealing. But if you don’t pay off your credit cards, you not only will have to pay more in interest; it can make your credit score drop.

On the flip side, using a debit card for your purchases won’t impact your credit score, for better or worse.

Cashback and Rewards

Credit card providers offer a variety of incentives to encourage purchases made on credit, including receiving a percentage of purchases as cash back or earning points to spend on certain goods or services. But you should be sure to understand what conditions you’ll need to satisfy in order to earn those rewards.

It all comes down to what perks matter to you. Do you want to simplify your payments by just using a debit card, or using a rewards credit card to earn points for things like airplane tickets or hotel stays? Do you tend to shop at a certain store that offers great discounts for using their store card, or at a variety of merchants? And do you have the ability to pay off your credit card balance each month, or do you see yourself carrying a balance?

Deciding between a credit card and a debit card doesn’t have to be either-or, of course. Many people choose to use a debit card for everyday purchases and withdrawing cash, while using a credit card for bigger ticket items to pay them back over time and earn cash back or rewards.

How to Choose the Right Credit Card for You

If you have questions or want to find the right card option for you, our bankers would love to help. Simply tap the chat button on the bottom of this page or stop by any Hills Bank location to connect with a personal finance expert!