Debit Card vs. Credit Card: What's the Difference?

Debit Card vs. Credit Card: An Overview

Debit and credit cards are two of the most commonly used payment cards in the world. They both have a series of numbers embossed or printed along with the cardholder's name on the front. Each has a magnetic stripe on the back, a special security code, and an embedded microchip on the front that encrypts key personal and financial information related to the cardholder and the related account(s).

Although they work in similar fashions, there are inherent differences between the two. A debit card uses funds from your bank account while a credit card is linked to a credit line that can be paid back later, which gives you more time to pay for your purchases. A customer's credit line depends on their creditworthiness. In this article, we highlight these and some of the other major differences between these types of cards.

Key Takeaways

  • Debit and credit cards allow cardholders to withdraw cash and make purchases.
  • Credit cards are debt instruments but debit cards are not.
  • Debit card users can only spend the money available in their bank account unless they have overdraft protection.
  • A credit card is linked to a line of credit offered by the company that issues the card.
  • Credit cards help build credit history while debit cards don't.
Debit Card vs. Credit Card

Investopedia / Sabrina Jiang

Debit Card

A debit card is a great option over a credit card for anyone who wants to budget or not rein in their spending, a debit card linked to a checking account may be a better option than a credit card. Although it looks just like a credit card, the similarities mainly end there. Banks issue their customers debit cards to provide them with convenience so they can access funds without having to write a paper check or make a cash withdrawal.

A debit card is linked to a checking (or savings) account and can be used anywhere credit cards are permitted. They can be used to do routine banking at financial institutions, make cash withdrawals from an automatic teller machine (ATM), as well as purchases at retailers in-store and online. When you use your card, the bank places a hold on the amount spent. Depending on the purchase amount (and your bank), the money is debited immediately out of your account or is held by the bank for 24 hours. This can be longer if it's a weekend, holiday, or if your account has any special flags.

Debit cards require the use of a unique personal identification number (PIN). When you use the card to make a cash withdrawal or a purchase, you may be asked for your PIN, or you may be asked to sign for the purchase just like a credit card. Newer cards with chip technology may not even require any additional action for purchases depending on the terminal or bank.

Some banks issue ATM and debit cards, which are two different versions of the same thing. Both allow you to withdraw funds from your checking or savings account at an ATM. But a debit card with a Visa or Mastercard logo can typically only be used to purchase goods and services.

Credit Card

A credit card is a payment card that is generally used to make purchases online or in retail stores and can also be used to make cash withdrawals, which are called cash advances.

Unlike debit cards, which are given to every individual with a bank account, consumers must apply and qualify for a credit card. Financial institutions review a person's creditworthiness and, if approved, grant a specific credit limit to the cardholder. The better someone's credit, the higher their limit. Individuals should exceed spending beyond that limit. If they do, there's a chance that the transaction may be denied. If it does go through, cardholders may incur over-limit fees.

When you use a credit card, the purchase amount is automatically added to your outstanding balance. Most credit card companies give customers 30 days to pay the balance in full before any interest is charged. In some cases, such as cash advances, the interest starts accruing right away. Interest rates are a primary driver for company revenue, which explains why credit card interest is notoriously high. Savvy consumers avoid paying interest by paying off their balance in full before the next due date.

Some credit cards allow you to earn points and rewards. Using your card responsibly can help you build and maintain a strong credit score while getting some perks at the same time.

Key Differences

You can't use your debit card if your bank account is empty (unless you sign up for overdraft protection), but you can use a credit card. When you use a debit card, the money is automatically taken out of your checking account. When you use a credit card, you pay the bill later. Keep in mind, though, that credit cards can help you build up your credit. Or they can hurt it if you don't use them responsibly. Debit cards, though, won't impact your credit score.

A debit card is simply a tool to use in place of a check or actual cash. When you use a debit card, you are using your funds but you are borrowing money from your card issuer when you use a credit card. But there isn't necessarily a better card to use. Using credit versus using a debit card, which is essentially cash, depends on how you want to spend and manage your money.

If someone steals your debit card and takes funds out of your account, it may be more difficult and take longer to get the funds back than if someone steals your credit card. In that case, you can report the card stolen, and your liability is limited. Regardless of whether it's your debit or credit card, it's important that you report it stolen immediately to your bank or credit card issuer.

Special Considerations

The distinction between debt and non-debt instruments becomes blurred if a debit card user decides to implement overdraft protection. In this case, whenever a person withdraws beyond the balance in their account, the bank pays the outstanding amount. The bank account holder is then obligated to repay the account balance owed and any interest charges that apply to overdraft protection.

Overdraft protection is designed to prevent embarrassing situations, such as bounced checks or declined debit transactions. But this protection comes at a cost. Since it's considered a temporary loan, banks charge interest for using the service. Rates are very high—if not higher than those associated with credit cards. So if you have a debit card linked to an account with overdraft protection, you may end up with debt-like consequences.

Some debit cards are prepaid. These cards are loaded by financial institutions and can be used in the same manner as a regular bank-issued debit card. Prepaid cards, on the other hand, are just that—they're prepaid. This means they are not linked to a person's checking account.

Debit Card vs. Credit Card Example

Here's a hypothetical example to show how debit and credit cards work. Let's consider two customers who both purchase a television from a local electronics store. Each set costs $300. One uses a debit card, and the other uses a credit card.

The debit card customer swipes their card. Their bank immediately places a $300 hold on their account, effectively earmarking that money for the purchase. This prevents the consumer from spending it on something else. Over the next one to three days, the store sends the transaction details to the bank, which electronically transfers the funds owed to the store.

The other customer uses a credit card. When they swipe it, the credit card company automatically adds the purchase price to their card account's outstanding balance. The customer has until their next billing due date to reimburse the company by paying some or all of the amount shown on their statement.

What's the Main Difference Between a Debit Card and a Credit Card?

The main difference between the two cards is the question, "Do you want to pay now or later?" A debit card is tied to your checking or savings account, and when you use it, funds are removed within 24 hours from your account. A credit card can be used to immediately pay for goods and services, but you pay for them when your monthly bill is due.

Which Is Better, a Credit Card or a Debit Card?

Each card has its own uses and benefits depending on the individual. For example, you may want to consider a credit card for larger purchases but only if you know that you can pay your bill on time. If you need cash, it is less expensive to use your debit card rather than take a cash advance on your credit card. When you pay with cash, you don't go into debt, which is a risk when you use a credit card.

Credit cards are useful in an emergency at home and abroad. If you have a line of credit at your disposal, you can make an emergency payment without worrying about the money going out of your bank account. Most car rental companies, hotels, and resorts only accept a credit card on file versus a debit card when you travel, although Visa and Mastercard debit cards allow individuals to use their debit cards like a credit card.

If you want to build up your credit history, it makes sense to use your card responsibly. Likewise, if your card comes with a rewards program, you may want to use your credit card to earn these benefits. While some debit cards may offer rewards, most don't, and your debit card doesn't affect your credit history.

Is a Credit Card Safer Than a Debit Card?

In most cases, yes. If someone steals your debit card, they have direct access to the cash in your accounts. If someone steals your credit card, you don't lose actual money from your checking or savings account. Banks will freeze your account when you report a debit or credit card stolen, but the impact will be greater if your credit card is stolen or used by someone else.

Can I Use a Credit Card as a Debit Card?

You can use your credit card at an ATM to take out a cash advance from your line of credit. However, most credit cards come with high fees for taking what is, in essence, a short-term loan from your creditor. If you need cash, it may be more prudent to use your debit card.

The Bottom Line

By definition, all credit cards are debt instruments. Whenever someone uses a credit card for a transaction, the cardholder is essentially just borrowing money from a company because the credit card user is still obligated to repay the credit card company.

On the other hand, debit cards are not debt instruments because whenever someone uses a debit card to make a payment, that person is just tapping into their bank account. Except for any related transaction costs, the debit user does not owe money to any external party; the purchase was made with their available funds.

Debit cards and credit cards are both useful tools when you are paying for goods and services. If you are worried about overspending and on a tight budget, a debit card (without an overdraft) may ensure you only spend what you can afford.

A credit card will help you build your credit history, and it is useful in an emergency. You will be less liable for charges if someone steals your credit card versus your debit card, but you run the risk of getting into debt with a credit card with charges that you can't afford to pay back. Both cards can be useful to consumers, especially those who pay close attention to their purchases and pay their bills on time.

Article Sources
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  1. Federal Trade Commission. Consumer Information. "Lost or Stolen Credit, ATM, and Debit Cards."

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