Last Updated: January 12, 2023
A lot of people don’t even think about the difference between debit and credit cards. After all, they both look the same. Most physical and online stores accept them, and they offer the benefit of never needing to carry cash. So, aside from the name, what’s the difference?
What Is a Debit Card?
A debit card is a payment card that will deduct money directly from your checking account to pay for a purchase. This eliminates the need to carry physical checks or cash.
Unlike credit cards, you cannot go into debt when using a debit card. With the exception of small negative balances that may arise if you have signed up for an overdraft.
Debit cards commonly have daily purchase limits. This means you cannot spend too much money in a day using this type of card.
How Do Debit Cards Work?
When you open a checking account with a credit union or bank, you will typically receive a debit card.
This gives you the ability to spend funds from your checking account without needing to write a check or withdraw money.
You can use your debit card to:
- Withdraw cash from an ATM
- Purchase products or services in a store
- Make purchases online
When you pay for something with your debit card, the money will immediately come out of your checking account. You do not have any bills to pay at a later date.
There are also prepaid debit cards, which work very much like gift cards, enabling you to spend whatever money is stored on the card.
What Is a Credit Card?
A credit card is a piece of plastic that you can use to make purchases. Sounds just like a debit card, right? It’s not; we assure you!
With a credit card, the money does not come from your checking account. You’re essentially borrowing money, and you need to pay it back on a set date every month.
A credit card may be issued to you by your building society, bank, or another type of credit lender.
Types of credit cards
There are different types of credit cards, including:
- Rewards cards
You can expect access to incentives and benefits with a reward card, such as cashback on purchases, air miles, and store points. This is one of the main benefits of a credit card over a debit card.
- Credit builder cards
This type of card enables you to build up your credit rating if you have a limited or poor borrowing history. They tend to have high-interest rates, yet if you use them sensibly and pay back everything you owe each month, you can show that you are a responsible person to lend money to.
- Balance transfer cards
You can move an existing debt over to a balance transfer card, which will typically offer you a lower interest rate and/or an interest-free period.
- Purchase cards
As the name suggests, these cards are for purchasing, with many offering a zero-interest rate period at the start. The difference between debit and credit cards in terms of purchasing is that you are essentially borrowing the money for free with a purchase credit card. Then you pay it back when it suits you (so long as within the interest-free period). With a debit card, you need to have the funds in your account at the time of purchase.
- Overseas cards
Designed for use overseas, you won’t have to worry about international fees with this type of travel credit card.
- Money transfer cards
You can use them to move money from your credit card into your bank account (essentially borrowing money from the credit card company).
How Do Credit Cards Work?
A credit card enables you to pay for things, yet the money does not come from your checking account. Instead, the credit card company pays for the item, and you receive a bill each month. If you pay this bill off in full, you won’t pay any interest.
If you pay a smaller amount than requested, the money will carry over to the following month and you will also be charged an amount of interest on your entire balance until it has been repaid in full. This is one of the main disadvantages of a credit card; you can end up paying a lot of interest if you don’t clear your monthly balance. The only exception is when you’re on a special 0% deal, which some companies run as an introductory offer for a set period of time, i.e. six months.
It is better to think of this as a “borrowing card” instead of a credit card. As you’re essentially borrowing the money, and you need to pay it back.
Credit Card vs Debit Card Fees
As you’re using your own funds to make a purchase, you may assume that there aren’t any fees for using a debit card. However, in special circumstances, you may be charged.
If you spend more money than is available in your account, you could have a fee to pay. But, how can you use a debit card with no money in your account to begin with? This is where overdrafts come in. An overdraft allows you to take out more money than you have on your account, yet you will typically be charged interest when entering this.
You may also receive a charge when making a cash withdrawal from an ATM. The ATM will display whether cash withdrawals are free or there is a charge per withdrawal and how much this is.
Charges are often applied to foreign transactions. Please contact your bank for specific charges, as they can differ from bank-to-bank and country-to-country.
So, when it comes to the credit card vs debit card battle, how do credit cards fair in terms of fees?
Like debit cards, you will be charged a foreign transaction fee when making a purchase in another country. However, there are some other charges you need to be aware of. If you make a late payment or you go over your credit limit, you will incur a penalty fee.
You will also pay a fee for any cash withdrawal, which includes using your credit card to send money to another person via the likes of PayPal.
Of course, you are also going to pay interest if you do not pay your credit card in full every month. This is calculated based on your card’s APR.
Are Credit Cards Safer Than Debit Cards?
Yes, credit cards are safer than debit cards in a number of ways:
- Your credit limit is not your own money – A debit card is linked with your current or savings account, meaning money is deducted from your own pocket with every transaction. If a hacker got access to your account, they could take your cash. In this sense, the difference between credit and debit cards is that transactions use the issuer’s money when made via a credit card. Therefore, your own funds are not compromised.
- Dispute misleading charges and transactions – If you use your debit card to shop for services and goods online, the only way to raise a dispute is to reach out to the seller and speak with them. This can be time-consuming and stressful! With a credit card for online shopping, the problem can be raised with the issuer, who then liaises with the vendor, saving you effort and time. You can also file disputes for billing errors and fraudulent transactions.
- Access extended returns and warranties – Another difference between a debit and credit card is that extended warranties and returns are offered on certain goods and services. This will kick in once the manufacturer’s warranty ends. Please note this is for eligible purchases only.
- You are protected against theft and fraud – If your debit card gets into the wrong hands, you must contact the bank and block your card. Whether any funds are refunded is on a case-by-case basis. With a credit card, the issuer will credit the amount of the fraudulent transaction immediately, which lowers liability. So, even though credit card fraud is common, you can dispute fraudulent charges or set up credit card fraud results.
When to Use a Credit Card
Credit cards give you flexibility when it comes to budgeting, as you can make purchases throughout the month and then pay off your credit card once you receive your monthly salary. You also get payment protection, which is why credit cards are good for large purchases.
You should also consider using your credit card when the purchase would make you eligible for a reward, such as cashback or air miles.
Another one of the main credit card advantages is that you can use this piece of plastic to help you build up a good credit score with the three major credit reporting agencies, Equifax, TransUnion, and Experian. If you have a poor or limited credit history, making purchases with your credit card and then paying your card off in full every month can help you to rebuild your score.
When to Use a Debit Card
So, when does a debit card win out in the debit card vs credit card battle? Well, in some cases using a credit card can result in a fee that can be avoided with the use of a debit card. For example, some online stores charge a percentage of the purchase (usually around 2%) for using a credit card.
If you are in credit card debt and struggling to pay off your balance, it is best to avoid using your credit card. While there are advantages associated with credit cards, none of these matter if you’re incurring too much interest and not paying off your card in full each month.
Debit Card vs Credit Card: Which Is Better?
There is no clear winner in the battle between debit and credit cards, as they both have their uses and benefits. Credit cards can help you make large purchases upfront while also offering great payment protection. Debit cards are a lot simpler; you’re spending your own money, so you always know where you stand. Understanding the difference between debit and credit cards should enable you to use them both appropriately so that you can reap optimal rewards.
The credit card you select should be appropriate for your circumstances. For example, if you want to purchase a new sofa, choose a purchase card. If you want to move debt from one credit card to another, you’ll need a balance transfer card.
Yes, you can use a credit card at an ATM. Please note that you may incur fees, depending on your credit company’s terms and conditions and whether the ATM owner charges for cash withdrawals.
Yes, a credit card is needed to build your credit rating. Without a credit card, you won’t be able to show lenders that you are a responsible person to lend to. You simply won’t have any credit history at all. Similarly to a poor score, this will make it almost impossible for you to get a mortgage or secure finances in the future. Instead, by using your credit card and paying it off every month, you can build or rebuild your score, which can help you when purchasing a property in the future.
You can use your debit card in most stores by simply swiping it and entering your personal identification number (PIN) number. You can also use your debit card online by entering the details displayed on the front and the back of the card. Plus, you can insert your card into an ATM to withdraw cash from your checking account.
While you can use your debit card for purchases where credit cards are permitted (for example, for online purchases), a debit card is not the same as a credit card and, therefore, cannot be used as credit. With a debit card, the money comes directly from your bank account. Most banks offer both debit and credit cards, so you could make an application for a credit card from your bank. However, you will receive a separate card for this, and they will be treated as two separate accounts.
A credit card can be good for budgeting because you can set your credit limit at an amount that is affordable for you. For example, if you know that you can afford to make $500 worth of purchases per month, you can set your credit limit at this amount, making the payment on your monthly date.
However, budgeting with a credit card requires discipline and good financial habits. This is a key difference between debit and credit cards. If you keep increasing your credit limit and failing to meet your monthly payments, it would be advisable to use your debit card so you’re only spending what you can afford.