3 Times You Should Always Use Your Debit Card

Debit cards get a bad rap these days. That poor, lonely piece of plastic at the back of your wallet often gets overshadowed by its flashy big brother, the credit card. That's because credit cards can have better perks and protection, and they pay rewards on your spending.

But credit cards aren't perfect either. If you don't pay down your balance each month, your credit card interest payments will cost you more than you'd earn in rewards. Plus, when you want to withdraw money directly from your savings or checking account, only a debit card will do.

Here are three times a debit card beats a credit card hands down.

1. When you're at the ATM

You can often use your debit card to get money out for free. You can also make payments, transfer money, and more at the ATM.

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• Most checking accounts offer fee-free withdrawals from in-network ATMs. Some banks, especially online banks, also reimburse the cost of a certain number of out-of-network withdrawals.
• Many savings accounts also allow a certain number of debit card ATM withdrawals, but that depends on your bank.

In contrast, using a credit card to withdraw money can get expensive fast. Firstly, you'll pay a fee for the transaction. That's usually 3% to 5% or $10 -- whichever is higher.

Secondly, you'll start paying interest on the withdrawal immediately. It isn't like other purchases where the interest only starts building after a grace period of around 21 days. Finally, the APR on credit card cash advances is often higher than your normal rate.

Let's say you use your credit card to take out $500 in cash. You'd pay a fee of $15 to $25 straight away. You'd then start accumulating interest immediately -- possibly at an APR of 29.99%. That could come to almost $2.90 per week, and over $12 a month.

If it takes you a few months to pay it off, you could be looking at paying around $50, just to withdraw $500 in cash. Always use your debit card to withdraw money.

2. When there's a fee to use your credit card

Many consumers prefer using credit cards because they can earn rewards on their spending. Unfortunately, that can be costly for sellers who pay processing fees of between 1.15% and 3.15% per transaction, according to The Motley Fool Motley Fool Money's research. Debit card payments don't cost merchants as much.

Rules vary by state, but some merchants pass the costs onto consumers. A study by The Strawhecker Group showed that 23% of small businesses charge customers a fee to pay by credit card.

When you check out, look for signs about an extra credit card fee -- or a discount for paying by cash or debit. Weigh this against the value of any rewards or purchase protection you might get.

Let's say there's a charge of 2% to use your card.

• If you're getting 1% cash back and don't need purchase protection, your debit card will be the better value.
• If you're buying a new washing machine and want purchase protection, it may be worth using your credit card.
• If you're trying to spend enough to get a credit card welcome bonus, you may opt to pay the convenience charge -- even if it costs more.

More and more merchants are charging credit card swipe fees -- the Nilson report estimates fees have increased fourfold in the past decade. That said, some stores charge debit card fees, too, so be aware before you swipe.

3. If you're worried about credit card debt

Almost half of American households have credit card debt, according to the Federal Reserve Bank of St. Louis. Of those, the average credit card balance is over $6,000. If you feel as if you're drowning under the weight of high interest payments, it's time to stop using your credit card.

Debit cards are ideal for anyone who struggles with credit card debt because you can only spend what you have. You can't run up a balance and accumulate interest. Some banks give customers a small cushion, overdraft-wise. But none of them will let you overdraw your account by thousands of dollars. Nor will they charge you upward of 20% in interest.

If you're trying to get out of debt, there are several strategies you can use. First and foremost, you need to ensure you spend less than you earn. Increasing living costs have stretched some family's budgets so much that they use their credit cards to cover essential costs. While this is understandable, it isn't sustainable.

If your credit card balance is growing every month, leave your card at home. Even if you have to make drastic cuts to your budget or take on extra work, find a way to live within your means. Using only your debit card means you'll only spend money that's in your account.

Key takeaway

There's a right time for every financial tool -- including your credit card and your debit card. Your debit card is almost certainly the best choice when you withdraw money. And there will be times when merchant swipe fees and interest costs will cancel out your credit card rewards. Weigh the costs against the value when you reach for the plastic.