How Debit Cards and Credit Cards are Different
On the surface, debit cards and credit cards look alike, with a chip and a magnetic stripe, your financial institution's logo, and the card network (like Visa or Mastercard). They both give you a convenient way to make purchases online and in stores.
So, what are the differences?
A debit card is a payment method you can use instead of paying cash. A debit card is linked to your checking or debit account, so purchases are automatically deducted from your balance.
Besides the convenience of not having to carry cash or write checks, debit cards offer several benefits:
- Debit cards can help you stick to your budget, since you’re limited by your available account balance.
- You won’t pay interest on purchases with a debit card.
- You can use your debit card to set up contactless payment and pay using your phone.
- If you need cash, you can use your debit card to get cash back with your purchase at the point of sale and also withdraw cash from ATMs.
But there are some drawbacks to using a debit card:
- You won’t pay interest for debit card purchases, but if you overdraw your account, you may be charged an overdraft fee. Other common debit card fees are out-of-network ATM fees.
- You can’t build your credit history or improve your credit score by using a debit card.
- You could be liable for fraudulent charges on your debit card unless you report a lost or stolen card promptly. If you wait too long, you could be responsible for the charges.
A credit card is connected to a line of credit that lets you borrow money to make purchases. Using your card means you agree to pay back the amount you borrow, plus interest if you don’t pay your balance in full each month. Many credit cards also offer cash advances and balance transfer options.
Credit cards can offer advantages that cash and debit cards don’t:
- Legally, you’re liable for only a small amount of unauthorized charges if your card is lost or stolen. Some credit card companies offer $0 liability for fraudulent charges.
- Having a credit card can help you build your credit history or rebuild your credit if you’ve run into some financial bumps.
- Many cards offer rewards and cash back on purchases. You can use the credit card for everyday purchases and earn rewards like merchandise, travel, gift cards, and more.
- A credit card can be a useful backup to pay for emergencies. If you do this, experts recommend paying off the card before the next billing cycle to avoid interest charges that can make a stressful situation worse.
While they can be great when used responsibly, credit cards have downsides as well:
- Because you don’t need to have the cash in hand to make purchases using a credit card, it can be easy to overspend and rack up debt.
- If you don’t pay off your credit card balance every month, you will be charged interest. The longer you keep a balance on your card, the more you’ll pay in interest.
- If you miss a payment, you could be charged a late fee. Missed or late payments can also damage your credit.
Which Card Is Right for You?
Debit cards and credit cards each have advantages. However, for certain transactions it might be better to use a credit card, such as when buying gas for your car. Gas stations may have increased security risks, which makes a credit card a safer choice because it isn’t linked directly to your bank account. Certain other businesses, like car rental companies and hotels, require credit cards to hold reservations.
Using a debit card can help stop you from spending too much on things you might not be able to afford and getting into debt. Plus, when you need cash, using your debit card at the ATM means you won’t be charged a cash advance fee, like you would if you used a credit card.
Ultimately, you may find that debit cards and credit cards are BOTH useful options to carry in your wallet.
Whether you use a debit card or a credit card, keep in mind the costs and benefits, so you can make financial decisions that work best for you. To learn more about choosing the right card for you, check out our other credit-themed articles.