Debit and credit cards look almost identical.
They have 16-digit card numbers, PINs, and expiration dates. However, a debit card is linked to your bank account while a credit card allows you to borrow money from the card issuer.
While both offer protection and convenience over carrying cash, there are some major differences between these two card types that could significantly impact your wallet.
It’s important to understand the difference between debit and credit when choosing which card to swipe.
Debit Card Overview
Debit cards look like credit cards. They even tend to carry a mark of a major credit card network, such as Visa or Mastercard. For all the similarities, one significant distinction stands out: where the money comes from to pay for a purchase.
Banks and credit unions offer a debit card when you open a new account. The card allows you to access the funds even if you’re not at the issuing bank. When you make a purchase or withdraw cash using your debit card, the money is drawn directly from your checking account.
If there isn’t enough money to cover the cost, the bank denies the transaction. This is a crucial variation since a credit card charges your purchase against a line of credit that you pay later.
Credit Card Overview
Credit cards are separate from any checking or savings account you might have. To make a purchase, you borrow money from the credit card company. Your ability to spend depends on your credit limit. Generally, better credit scores allow for higher spending limits.
With a credit card, you don’t pay for the purchase right away. The credit company pays the merchant and adds the amount to the balance of your account. Usually, it’ll send a bill once per month for the charges.
Though you don’t have to pay it in full, you will pay interest if you carry your balance from one month to the next. This can cost you since interest rates vary greatly between cards. The average in 2018 was 16.86%, but rates can go as high as 25% or more.
If you’re diligent in paying your balance every month, using a credit card could benefit you. That’s because most credit companies offer rewards or cash back for the money you spend. By paying your balance in full, you can cash in on the rewards programs.
But if you bring a balance forward from month to month, you’ll pay interest fees. Those add up over time and tend to cancel out any bonus you could get from rewards programs.
Credit Card vs. Debit Card
In the right situation, both a debit and credit card could be a fit for your financial goals. Here are the factors to help you decide which is best for you.
Your credit score has a big impact on your financial well-being. A solid credit history can qualify you for lower rates when buying a home, shopping for a car, and even getting car insurance. Without it, you might not be eligible for a cell phone plan or to rent an apartment. Therefore, in most cases, building your credit is essential.
This is one area where debit cards come up short. Using debit doesn’t help your credit at all. Neither your payment history or usage report to any of the major credit bureaus, and it has no impact on your credit score.
On the other hand, credit cards are great for your credit score. If you don’t already have a credit history, getting a credit card is the fastest way to begin. Some companies require you to have minimum credit qualifications to get approval. But a secured credit card or one from a department store tends to come with less stringent requirements.
Once you open an account, credit agencies usually receive an update on your balance and payment history each month. Because of this quick turnaround, using a credit card is one of the best ways to build your credit.
Earning rewards is quite common, and you’ll generally earn points or get relationship rewards.
Rewards points – Every time you use the card to make a purchase, you accrue points. The amount you get varies from card to card. For example, you could earn 1 point for every $1 you spend or 1 point for every $5. Trading your points for travel discounts or gift cards is pretty simple.
Relationship rewards – These are specific to the company that issues the card and typically come in the form of discounts or other perks. For instance, you might get a free night’s stay at a hotel if you have a hotel-branded card. Or your debit card could offer discounts at individual stores and online retailers.
Depending on the card, signup bonuses for new account holders can pocket rewards for free airfare, hotel rooms, or hundreds of dollars in cash back. After the signup bonus, you’ll continue to earn on every purchase. That means you could get rewards every time you buy groceries, get gas, or make a hotel reservation.
Credit card rewards are everywhere. However, finding a debit card with a rewards program can be a challenge.
Fraud and security
Credit and debit cards are both at risk for fraud and identity theft. But a debit card has a higher chance of difficulties. It comes down to access to funds and your liability under federal law.
If your debit card information gets out, the thief has direct access to your money. Time is short to react because the funds are drawn from your account almost immediately. It could take weeks or months to sort out debit card fraud.
With credit card purchases, it’s the credit company’s money on the line. A quick call lets you dispute the charge, and you’re not responsible for paying it until the matter settles.
Your liability under federal law is different with a debit card vs. credit card, too.
For credit cards, the Fair Credit Billing Act (FCBA) puts limits on your liability as a cardholder, such as:
- $0 liability for costs if a company gets notice before the card is used
- $0 liability for unauthorized use if only the credit card number is stolen
Debit cards fall under the Electronic Funds Transfer Act (EFTA), which isn’t nearly as comprehensive. The liability varies but generally includes:
- No obligation if a card is reported lost before unauthorized charges are made
- $50 liability when reporting the loss within 2 business days
- $500 liability if reported more than 2 days but less than 60 days after the statement is sent
- For more than 60 days after the statement is sent, liability extends to all the money taken from your account
Generally, a credit card is your best bet for security and protection against fraud. Under current law, your liability is much less if it involves fraudulent use of a credit card.
Precautions play an important role in keeping your information safe. Keep a record of your account numbers, never leave them out in the open, and don’t share your account number over the phone unless you initiate the call.
Access to cash
Having quick access to cash is a significant draw of debit cards. Paying for purchases is easy by swiping your card at a retailer, and the money draws straight from your bank account. If you want cash in your hand, asking for cash back during the checkout process is a breeze, too.
Debit cards also give you access to cash at one of the more than 470,000 ATMs across the country. Fees sometimes apply to withdraw the money, and that can add up if you do so frequently. But most banks are part of a free ATM network or will reimburse you for any access fees you might pay.
Withdrawing cash at an ATM with a credit card is also an option, though the cost is much higher. Most credit card companies charge a 3% to 5% cash advance fee. On top of that, there’s typically a higher interest charge for cash advances than regular purchases.
It’s more cost effective to use a debit card for access to cash. But if you need more money than what’s in your bank account or don’t have your debit card with you, using a credit card is a viable option.
It’s harder, though not impossible, to overspend with a debit card. Unless you’re enrolled in overdraft protection, your bank simply denies the transaction if you don’t have sufficient funds.
The caveat is if for automatic recurring payments. For example, if your insurance premium is set to auto draft, your bank may still allow the transaction to go through, even if you’ve declined overdraft protection. Policies vary, so be sure to check with your bank so you know what to expect.
For credit cards, a cap determines how much you can use at one time. If you’re not tracking your expenses, you could go over that limit. The credit company will usually decline your transaction when this happens, but not always.
When opening the account, you were likely given a choice to participate in “over-limit protection.” But going over the limit comes at a cost, as the company often charges additional fees for overspending if you opt into this program.
Additional perks and benefits
Each card is different, but there are some additional benefits to consider. If you need short-term financing, a credit card is useful. After you make a purchase and before the bill comes, you have a grace period before interest charges appear. This gives you “free” financing for up to a full billing cycle, depending on when you bought the item.
Another perk is that extended warranties are almost automatic for electronics and other items. You may get free rental car insurance when you use your credit card to make the reservation.
Credit Card vs. Debit Card: Which Should You Use?
A credit card generally has more consumer protections against fraud and most let you earn rewards points. But a debit card can help to keep your spending on track because it pulls money from your checking account almost instantly.
Whether you choose to use a credit or debit card, your decision carries some weight. They’re both excellent options to make purchases and pay for services, and the right one for you depends on the situation.