There are stark differences between credit cards and debit cards, even though they may look very similar.
Both are 3.375 inches wide by 2.125 inches high, typically have 16-digit card numbers and an expiration date, magnetic strip and an EMV chip, but credit cards allow you to borrow funds and debit cards draw money directly from your bank account. Read on for more information about the differences between the two card types.
Credit card vs. debit card key differences
While you may carry both a debit card and a credit card in your wallet, know that when using a debit card, the funds used to pay for a purchase will come directly from the bank associated with your debit card.
Conversely, when using a credit card for purchases, you are borrowing from a line of credit issued to you by the credit card-issuing bank or credit union at a set interest rate established by the credit card issuer. You will be billed every month for the amount you charge to your credit card, plus any interest charges and fees.
Credit cardholders can opt to pay off the entire balance by the due date or just pay the minimum required payment amount. If you only make the minimum payment, which is typically a percentage of your balance plus any interest charges or fees or a flat amount (depending on your credit card issuer), then any balance rolled over to the next billing cycle will be subject to interest charges.
Repeatedly adding new charges to a credit card and only paying the minimum amount due can make it very easy to fall into a cycle of high revolving debt as interest charges can quickly inflate your overall credit card balance, making it more difficult to pay off.
Credit card vs. debit card key differences
What is a credit card and how does it work?
A credit card is typically issued by a bank or credit union, and to obtain one, you must formally submit an application. A credit card application generally requires you to include your name, address, Social Security number, income and employment status and whether you own or rent your home.
The card-issuing bank will then review your credit profile and credit score to determine whether you fit the criteria it requires for approval. Essentially, applying for a credit card is akin to applying for a loan, since the bank or credit union will evaluate your creditworthiness to decide whether you’ll be a responsible customer who will repay what you borrow on the card.
Once the issuer reviews your application and credit profile, it will either grant you a line of credit or reject your application. If your application is rejected, the card issuer is required to send you a letter stating why your application was turned down.
If approved for a new card, you can then use it for purchases up to the credit limit assigned to the card.
You will be billed monthly for those purchases with a payment due date. You can either pay the bill in full or make the minimum monthly payment listed on the invoice. If you don’t pay the entire balance off every month, you will be charged the interest on any remaining balance. Your interest rate is set by the card issuer.
If you miss the payment deadline, you may incur a late payment fee. And if your payment is more than 60 days late, you may also be hit with a “penalty rate,” which is an interest rate higher than the one initially assigned to the account.
Finally, the card issuer will report all your borrowing and repayment activity to the big three credit bureaus (Equifax, Experian and TransUnion), which will play into how your credit score is calculated.
Pros of using a credit card
Some basic benefits of using a credit card over a debit card include:
- Responsible credit card usage can help build your credit score.
- The ability to finance a large purchase over time.
- Some credit cards offer extended warranty and purchase protections beyond what a retailer will offer.
- Better fraud protection than debit cards.
- The ability to dispute unauthorized purchases.
There are different types of credit cards that are tailored to a cardholder’s needs or wants. These can include:
- Cash-back cards offer a certain percentage back on different types of purchases, with earnings often redeemable for statement credits, gift cards or even deposits to your checking account.
- Travel rewards cards offer points or miles that can be used toward travel purchases, and may also include additional travel benefits or protections, such as car rental coverage or lost baggage coverage.
- Premium credit cards carry high-end benefits such as a personal concierge service, airport lounge access or special event access.
- Balance transfer cards allow you move high-interest debt to a card offering an introductory low- or no-interest period in which to pay off the balance faster.
- No-frills credit cards often come with no annual fees and no rewards programs.
- Secured credit cards require a security deposit that acts as your credit line, and can be a great option when you are looking to build or rebuild your credit profile.
- Charge cards generally don’t have a credit limit, but you are required to pay the entire balance every month instead of having the option to just make a minimum payment.
Some things to pay attention to when researching credit cards include annual fees, interest rates, penalty fees, cash advance fees, balance transfer fees, rewards program specifics and card benefits.
Know that rewards cards, especially premium credit cards, may come with annual fees that can range from under $100 to more than $600 a year, which will be added to your balance every account anniversary year.
Cons of using a credit card
With a credit card, you are borrowing money from a lending institution, which carries risks if you don’t repay what you borrow in a timely manner.
Plus, if you allow your credit card balance to get out of control, it can be incredibly easy to get buried under a mountain of debt as interest charges inflate your balance, making it harder to pay off.
And since your account payment and balance activity is reported to the credit bureaus, your credit score could be negatively impacted if you tend to max out your credit limit routinely or don’t make payments on time.
Learning how to successfully manage your credit card spending and repayment of what you borrow boils down to these four behaviors:
- Pay your credit card bill on time every time. Payment history accounts for 35% of your credit score, so even if you can only afford to make the minimum payment one month, be sure to pay it on time. You can also set up automatic payments with either your bank or credit card to ensure timely payments.
- Don’t charge more than you can afford to pay off each month. If you do want to finance a large purchase over several months, make sure you create a repayment plan before adding more purchases to your existing balance.
- Don’t max out your card. Keep your balance well below your credit limit. Routinely charging up to your allowable credit limit can negatively impact your credit score as it can send up a signal that you might be in financial trouble.
- You can avoid interest charges entirely by paying off what you charge every month. If you do this, you’re essentially getting an interest-free loan every month.
Also, be aware many credit cards charge annual fees (especially credit cards offering rewards programs), late fees, over-limit fees and punitive interest rates if you routinely pay late.
When should you use a credit card?
When deciding whether or not to use a credit card over your debit card for a purchase, here are some important considerations that can help you decide:
- You’re looking to build or rebuild your credit history and credit scores by using a credit card responsibly.
- If you have a large expense that you want to spread out payments over time. For example, if your dishwasher needs replacing, you can purchase a new one with your credit card and pay it off over several months. Know that some credit cards offer an introductory 0% APR for purchases, which allows you a certain timeframe in which to pay off what you owe interest free during the promotion. Any unpaid balance left over after the promotional period expires will be subject to the card’s ongoing interest rate.
- You want to earn cash-back rewards, miles or points with your rewards card that can be applied as statement credits or redeemed for future travel purchases.
- You want to take advantage of a card’s extended warranty coverage or purchase protection coverage for a pricey purchase, such as a laptop, appliance or car repair, to protect against damage or loss.
- You’d like certain travel protections offered by travel rewards cards, such as for lost baggage, rental car coverage, trip interruption or cancellation coverage, etc.
- You want the fraud protection a credit card offers for unauthorized charges in case your card gets lost or stolen. Generally, most credit cards offer zero liability coverage, meaning you won’t be held liable for those charges. Or, if a credit card does not offer zero liability coverage, you won’t be responsible for fraudulent charges over $50.
What is a debit card and how does it work?
A debit card involves no borrowing of money, but rather acts as direct withdrawal from funds in your checking or savings account when used to make purchases. Most banks and credit unions offer debit cards to their customers that are tied to their accounts.
There are generally no annual fees associated with debit cards and there is no interest involved.
You can’t spend more than what you have in the bank or credit union account associated with your debit card as the card will be declined if there aren’t funds to cover the transactions. Know that some financial institutions allow you to opt into an overdraft line of credit, but you may be assessed a fee and/or interest for that service.
Debit card activity is not reported to the credit bureaus, so you won’t have the opportunity to add positive information to your credit reports by just using a debit card.
Pros of using a debit card
Perhaps the best aspect about using a debit card instead of a credit card is that it’s impossible to get into a cycle of escalating revolving debt as you are just using funds directly from your bank account instead of borrowing money that isn’t yours.
There are no interest charges involved with a debit card nor are there annual fees.
Debit cards are easy to use, accepted nearly everywhere and more convenient than carrying around cash. They’re great for making routine purchases, such as groceries, and can help you keep from overspending.
Finally, your debit card is most likely your ATM card, allowing you to withdraw cash easily from ATM terminals. But using a credit card at an ATM is considered a cash advance, which can be costly as interest accumulates immediately on the transaction and often is assessed with a higher interest rate than your ongoing APR.
Cons of using a debit card
Know that debit cards don’t have the same robust protections as credit cards when it comes to liability for fraudulent use, although some financial institutions have adopted debit card zero liability protections — but not all.
That means that if you don’t report a lost or stolen debit card within 48 hours, your liability for unauthorized charges can rise to $500, and after 60 days, there is no limit. Plus, you’ll be out those funds in your bank account until an investigation is completed and ruled in your favor.
That’s why it’s best to use a credit card for, say, online purchases or filling up your gas tank, for the increased fraud protections.
Debit card rewards programs, if your card offers that, can’t compare with some of the more generous credit card rewards programs. For example, you can’t earn miles or points with your debit card or earn anywhere from 2% to 6% cash back in certain spending categories.
Many people carry both a debit card and at least one credit card, and divvy up their purchases based on where it makes the most sense to use one type of card over another.
Frequently asked questions (FAQs)
Using a debit card can prevent you from getting deep into credit card debt since debit card transactions are limited to what you have in the bank. You don’t have to worry about interest rates or annual fees, but know that the fraud coverage offered on credit cards is more comprehensive than debit cards. Plus, if you have fraud on your debit card, you’ll be out for the funds until you can get the situation resolved.
Yes, some debit cards offer rewards programs, but in general, rewards programs associated with debit cards are much less generous than those offered by credit cards.
For example, the Discover Cashback Debit Account offered 1% cash back on purchases up to $3,000 in purchases each month (the account is currently closed to new applications). That would net you a max of $30 a month.
Conversely, the Wells Fargo Active Cash® Card offers an unlimited 2% cash rewards for purchases made with the card. If you spent $3,000 a month on this card, you’d earn $60 in cash back. Plus, the card has no annual fee.
It’s best to have both a credit card and a debit card. Using a credit card responsibly can help build your credit score and gives you access to funds that you may not otherwise have for emergencies or for financing a large purchase over time, not to mention the fraud and purchase protections.
A debit card allows you to access the funds you have in your bank account without having to carry around a lot of cash. That makes debit cards great for daily spending and helping you keep within your budget.
A credit card offers much more protection than a debit card. Most credit cards offer zero liability protection, meaning you’re not liable for anything in the case of fraud. In the rare case of a card that doesn’t offer zero fraud liability protection, the Fair Credit Billing Act caps the liability for transactions by unauthorized users at $50.
With a debit card, if you report the card lost or stolen within two days, you could be liable for a maximum of $50, or $500 if reported within 60 days. If you don’t report a lost or stolen debit card after 60 days, you may not have any protection against lost funds.
A credit card issuer will remove a fraudulent charge from your card as it launches an investigation, whereas with a debit card, you’ll most likely have to wait until after an investigation is completed and ruled in your favor before any missing funds are returned to you.
While most debit cards can be used at ATM machines, a strict ATM card only allows you to use the card to withdraw cash from an ATM, but can’t be used to make purchases. If your ATM card has a Visa or Mastercard logo, then it can also be used to make purchases in addition to withdrawing funds from an ATM.
