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When looking to pay for purchases, many people simply pull out a card and swipe, but does it make a real difference whether the card is a credit card or a debit card?
The answer is yes, and there are some key differences that will determine which is the best choice. So, here we’ll look at credit vs debit cards to help you decide which is the smarter choice.
How Do Credit Cards Work?
As the name suggests, a credit card allows you to spend on credit. Each time you use your card, the transaction is logged on your credit card account. Each month on your billing day, the transactions are put into a statement, which is sent out to you.
Your statement details all the transactions you’ve made during the month, any outstanding balance that was carried over from last month, the total amount outstanding and the minimum amount you need to pay by your due date.
Unless you pay the total amount outstanding in full each month, you’ll incur interest. The credit card company calculates the interest according to the outstanding amount and your rate.
- Example
For example, if your rate is 24% APR, and you have a $1,000 balance, you’ll have $20 in interest charges added to your account. Typically, the minimum amount due covers the interest charges and a little off the principal balance.
So, if you only ever pay the minimum amount due, it could take years to clear your balance, particularly if you keep adding new charges to the account.
How Do Debit Cards Work?
Although they may appear similar, debit cards work in a very different way. Your debit card will be associated with your checking account.
When you swipe a transaction or use your card to make an online purchase, the transaction amount is almost immediately applied to your checking account.
You may notice that your checking account balance immediately reduces by the corresponding amount or it may take a day or so to appear on your statement.
In some cases, the transaction amount may be put on hold on your account. This means that while your account balance remains the same, your available balance will be lower.
This prevents you from withdrawing these funds and when the transaction is applied to your account, the account balance and available balance will return to the same amount.
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Credit Vs. Debit Cards: Key Differences
As we’ve just discussed, credit and debit cards work in different ways, but there are some key differences that can highlight this even further and help you to decide which one is best for you.
- Fees
The most obvious area of difference is in the fees. A debit card allows access to the funds you already have in your account, which means that you’ll not pay any interest on the transaction.
Another fee difference is that many credit cards have an annual fee. This amount is added to your credit card balance on your statement anniversary each year. This fee can be anywhere from $0 to hundreds of dollars, depending on your card.
However, debit cards are typically provided as a free feature of your checking account. If this is your first credit card, it may be worth consideration.
- Safety
This is an area where credit cards have a definite edge. Most credit cards are provided with fraud prevention. This means that if you make an online transaction and your details are taken by fraudsters, there is minimal risk to you.
Your credit card issuer will lock the account and you’ll not be liable for any unauthorized transactions. While your bank may offer similar reassurances for unauthorized debit card transactions, there is a risk that fraudsters could empty your entire checking account before you notice a problem.
Although you may get the transaction funds returned, you could incur fees and charges when payments for your bills bounce due to insufficient funds.
- Rewards
One of the main reasons why many people like using credit cards is that you can earn rewards with your purchases. There are three primary forms of rewards; cash back, miles or points.
In each case, you’ll accumulate rewards that you can either redeem for cash or other rewards such as travel, gift cards or experiences. Some banks offer rewards with debit card transactions, but this is uncommon.
- Credit Score Building
One important difference between credit and debit cards is their impact on your credit score. Since a debit card is linked directly to your checking account, it doesn’t help build your credit history.
In contrast, your credit card activity is reported to credit bureaus. Every payment you make—or miss—gets recorded on your credit report. With responsible use, your credit card can be a useful tool for improving your credit score.
Credit Card Pros and Cons
Using a credit card has a lot of benefits, but some drawbacks to know:
Pros | Cons |
|---|---|
Ability to Spread the Cost of Purchases |
Interest and Fees Charges |
Credit Building | Overspending and Debt Potential |
Increased Protection |
- Ability to Spread the Cost of Purchases
If you’re planning on making a large purchase, a credit card will allow you to spread the cost over a few months or longer. Some credit cards have a 0% APR promotional period, which means that during this time any transactions will not incur interest.
This allows you to spread the cost of a large purchase with no additional expense.
- Credit Building
With responsible use, a credit card can help you to build or boost your credit score, since each monthly payment is logged on your credit report.
- Increased Protection
Most credit cards have excellent fraud liability protection, which means that you can feel comfortable using your card in physical stores or online without worrying about fraudsters.
- Interest and Fees Charges
Credit card companies rarely offer their services for free. Although you may have an introductory period with 0% interest intro, after this period ends, you could be paying anywhere from 15% to 36% APR or more, depending on your credit score.
Some credit cards require an annual fee (but it's definitely possible to find cards with no annual fee).
- Overspending and Debt Potential
Since you’re not paying for your purchases immediately, there is a great potential to allow your spending to spiral out of control.
Unless you are very disciplined about using your card and clear your balance with every statement, you could end up racking up debt.
Debit Card Pros and Cons
Debit cards can be very helpful for consumers in some cases. Here are the main pros and cons:
Pros | Cons |
|---|---|
Readily Available | Immediate Payment |
No Fees | Potential for Loss |
Configurable |
- Readily Available
Debit cards are considered a standard feature on checking accounts. Unless you have very poor credit, you should find it very easy to obtain a debit card.
- No Fees
Most banks provide a debit card free of charge as a benefit of their checking accounts. Unless you need to pay for a replacement card, you should be able to use your card with no fees or charges.
Most cards are even configured so that you can’t swipe for a transaction that would cause your account to go overdrawn.
- Configurable
Many banks allow you to configure the limits and restrictions for your debit card. This means that you can set the maximum ATM withdrawal limit for the day or week and the maximum charge amount.
This not only makes it easier to control your spending, but it also reduces your risk in the event that your card is lost or stolen.
- Immediate Payment
Your debit card will not allow you to make a purchase above the available balance in your account. If you don’t monitor your account balance, this can lead to an embarrassing moment at the check out.
- Potential for Loss
If your debit card is lost or stolen, there is a risk that your entire account balance could be cleared in the minutes it takes you to notice and report it to your bank.
Although you may be able to recoup the funds from unauthorized transactions, you could still incur charges and credit score consequences from bounced or late payments that occur due to your bank account having insufficient funds.
When to Consider a Credit Card?
There are some circumstances when you should give a credit card serious consideration. These include:
- Making a large purchase: If you are planning on making a large purchase, having a credit card could allow you to spread the cost over several months, particularly if you have a low introductory rate. You can simply pay for your purchase with your card and then pay off the balance with each statement.
- Financial emergencies: A credit card can be a very handy tool if you are concerned about any financial emergencies. If you have an unexpected home repair bill or you need to have your car repaired, you can cover the expense with your credit card and you won’t need to wait until payday.
- You want to earn rewards: With disciplined and responsible use, a credit card can be a fantastic way to accumulate some great rewards. There are many credit cards offering cash back, points, or miles with your purchases. This means that you could accumulate miles for a vacation or save up your cash back for a nice treat.
When to Consider a Credit Card? | When to Consider a Debit Card? |
|---|---|
Making a large purchase | You want to avoid debt |
Financial emergencies | You don’t have excellent credit |
You want to earn rewards | You want minimal fees |
When to Consider a Debit Card?
Likewise, there are some circumstances when it would be better to consider a debit card:
- You want to avoid debt: A debit card will only allow you to spend your money in your account. Therefore, your bank will not authorize a debit card transaction allowing you to go overdrawn. This means that there is minimal chance of going into debt.
- You don’t have excellent credit: Unless you have excellent credit, you’ll struggle to qualify for the best credit card rates. However, debit cards are typically available to anyone who can qualify for a checking account.
- You want minimal fees: Credit cards tend to have annual fees, and unless you clear your bill each month, you’ll pay interest on the outstanding balance. On the other hand, debit cards have very few fees. This is because they are often provided as a free benefit when you open a checking account. In most cases, the only debit card fee you’ll incur is for a replacement card if your card is lost.
Bottom Line
Credit and debit cards might look similar at first glance, but they operate differently and serve different purposes.
Your financial situation will help determine which card is right for you—sometimes a credit card is the better option, and other times a debit card makes more sense.
Take some time to consider your current and future financial needs to decide which choice is best for you.
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