Credit Cards vs. Debit Cards: An Overview

Credit cards and debit cards typically look almost identical, with 16-digit card numbers, expiration dates, and personal identification number (PIN) codes. Both can make it easy and convenient to make purchases in stores or online, with one key difference. Debit cards allow you to spend money by drawing on funds you have deposited at the bank. Credit cards allow you to borrow money from the card issuer up to a certain limit in order to purchase items or withdraw cash. 

You probably have at least one credit card and one debit card in your wallet. The convenience and protection they offer are hard to beat, but they have important differences that could substantially affect your pocketbook. Here's how to decide which one to use to meet your spending needs.

Key Takeaways

  • Credit cards give you access to a line of debt issued by a bank while debit cards deduct money directly from your bank account.
  • Credit cards offer better consumer protections against fraud compared to debit cards linked to a bank account.
  • Newer debit cards offer more credit-card-like protection, while many credit cards no longer charge annual fees.
  • When comparing credit cards or debit cards linked to a bank account, it's important to consider the fees and benefits.

What Is a Credit Card?

A credit card is a card issued by a financial institution, typically a bank, and it enables the cardholder to borrow funds from that institution. Cardholders agree to pay the money back, with interest, according to the institution's terms.

Credit cards are issued in four categories: 

  • Standard cards simply extend a line of credit to their users for making purchases, balance transfers and/or cash advances.
  • Rewards cards offer cash back, travel points, or other benefits to customers, based on how they spend.
  • Secured credit cards require an initial cash deposit that is held by the issuer as collateral.
  • Charge cards have no preset spending limit, but often do not allow unpaid balances to carry over from month to month.

Credit card users can reap cash, discounts, travel points, and many other perks unavailable to debit card holders by using rewards cards. Rewards can be applied on a flat-rate basis or at tiered rates. For example, you might have a card that offers unlimited 2 miles per dollar on purchases and another that offers 3 miles per dollar for travel spending, 2 miles per dollar for dining and 1 mile per dollar for everything else. You could then use miles earned to book future travel arrangements.

Tip

When choosing rewards cards, pay attention to whether rewards can expire and what options you have for redeeming them.

Benefits of Using Credit Cards

Credit cards can offer certain advantages over debit cards, though they can also have some downsides. Here's a closer look at the pros and cons of spending with credit cards.

Build Credit History

Credit card use is reflected on your credit report. That includes positive history, such as on-time payments and low credit utilization, as well as negative items such as late payments or delinquencies. Your credit report information is then used to calculate your credit scores. Responsible spenders can raise their scores with a history of expenditures and timely payments and by keeping their card balances low relative to their card limits.

Tip

Many credit card companies offer free credit score monitoring and tracking as a card perk so you can keep an eye on your progress when building credit.

Warranty and Purchase Protections

Some credit cards may also provide additional warranties or insurance for items purchased—above those the retailer or brand is offering. If an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, for example, it is worth checking with the credit card company to see if it will provide coverage. Or you may have purchase and price protection built in to help you replace items that are stolen or lost or refund price differences when the item you purchased is sold elsewhere for less.

Fraud Protection

Credit cards offer much greater protection than debit cards in most cases. As long as the customer reports the loss or theft in a timely manner, their maximum liability for purchases made after the card disappeared is $50. The Electronic Fund Transfer Act gives debit card customers the same protection from loss or theft—but only if the customer reports it within 48 hours of discovery. After 48 hours, the card user's liability rises to $500; after 60 days, there is no limit.

Other Credit Card Benefits

The Fair Credit Billing Act allows credit card users to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping. But if the item was bought with a debit card, it cannot be reversed unless the merchant is willing to do so. What is more, debit card theft victims do not get their refund until an investigation has been completed.

Credit card holders, on the other hand, are not assessed the disputed charges; the amount is usually deducted immediately and restored only if the dispute is withdrawn or settled in the merchant's favor. While some credit and debit card providers offer zero-liability protection to their customers, the law is much more forgiving for credit card holders.

If you need to rent a car, many credit cards provide some sort of waiver for collisions. Even if you want to use a debit card, many car rental agencies require customers to provide credit card information as a backup. The only way out for a customer may be allowing the rental agency to put a hold of perhaps a few hundred dollars on a bank account debit card as a form of surety deposit.

Cons of Using Credit Cards

The main drawbacks of using credit cards center on debt, credit score impacts and cost.

Spending Can Lead to Debt

When you make purchases with a credit card you're spending the bank's money, not your own. This money has to be repaid, with interest. At the very least, you're required to make the minimum payment due to your card each month. Racking up high balances on multiple cards could make it difficult to keep up with monthly payments and put a strain on your budget.

Credit Score Impacts

Paying your bill on time and keeping balances on credit cards low can help your FICO scores. But misusing credit cards could hurt your credit history if you get into the habit of paying late, max out one or more of your cards, close down older accounts or apply for new credit too often.

Tip

Set up credit card alerts to notify you of payment due dates and card balances so you can pay on time and avoid maxing out your credit limit.

Interest and Fees

Since a credit card is essentially a short-term loan you'll have to pay back what you spend with interest. The interest rate and the fees the credit company charges are used to calculate your annual percentage rate (APR). The higher the card's APR, the more it will cost you to carry a balance from month to month.

In terms of fees, you should be aware of whether your card charges an annual fee, foreign transaction fee, balance transfer fee, cash advance fee, late payment fee or a returned payment fee. As a general rule of thumb, the better a credit card's rewards program is and the more benefits it offers, the higher the annual fee will be.

What Is a Debit Card?

A debit card is a payment card that makes payment by deducting money directly from a consumer’s checking account, rather than via loan from a bank. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors like Visa or MasterCard.

There are also two types of debit cards that do not require the customer to have a checking or savings account, as well as one standard type:

  • Standard debit cards draw on your bank account.
  • Electronic Benefits Transfer (EBT) cards are issued by state and federal agencies to allow qualifying users to use their benefits to make purchases.
  • Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was pre-loaded on the card.

Frugal consumers may prefer to use debit cards because there usually are few or no associated fees unless users spend more than they have in their account and incur an overdraft fee. (The no-fee advantage does not hold for prepaid debit cards, which frequently charge activation and usage fees, among other costs.) By contrast, credit cards generally charge annual fees, over-limit fees, late-payment fees, and a plethora of other penalties, in addition to monthly interest on the card’s outstanding balance.

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How Debit Cards Work

Benefits of Using Debit Cards

Debit cards can have both upsides and downsides, just like credit cards.

Avoid Debt

A debit card draws on money the user already has, eliminating the danger of racking up debt. Retailers know people usually spend more when using plastic than if they were paying cash. By using debit cards, impulsive spenders can avoid the temptation of credit and stick to their budget. This can help keep you out of high-interest debt.

Fraud Protections

In addition, some debit cards—particularly those issued by payment processors, such as Visa or MasterCard—are starting to offer more of the protections enjoyed by credit card users.

The key is reporting fraud or theft as soon as you realized it's occurred. Your liability for fraudulent purchases is determined by the time frame in which it's reported. Waiting too long to let the bank know that your card has been used for unauthorized purchases could result in you being held responsible for any and all losses.

No Annual Fee

While many credit cards charge an annual fee, debit cards don't. There's also no fee for withdrawing cash using your debit card at your bank's ATM. Credit cards, on the other hand, can charge a cash advance fee plus a steep interest rate for that convenience. You may, however, pay other fees to maintain your checking account.

Important

Cash advances from a credit card don't have a grace period; instead, interest begins accruing right away.

Cons of Using Debit Cards

Similar to credit cards, the biggest downsides of using debit cards center on credit score impacts and cost.

No Rewards

Unless you have a rewards checking account, you won't earn any points, miles or cash back on purchases made with your debit card. Since rewards can save you money, depending on how you redeem them, you could be missing out if you only spend with a debit card.

Won't Build Credit

Building good credit means demonstrating to lenders that you can responsibly repay money you borrow. When you're spending with a debit card that's linked to your bank account you don't have the opportunity to do that. So using a debit card alone won't help you establish or build a credit history.

Fees

While debit cards don't have an annual fee, you may pay other fees to have a checking account. Those can include monthly maintenance fees, overdraft fees if you overspend from your account, returned item fees and foreign ATM fees if you use your debit card at another bank or financial institution's machine.