Consumers today can make purchases in a variety of ways: Debit cards, credit cards, mobile wallet payments (like ApplePay and Google Pay), and even cash or old-style paper checks. It’s not surprising if you’re confused about the many payment methods available today.
And the two forms of payment mostly commonly confused? Credit cards and debit cards.
Debit cards and credit cards both make it easy to make purchases online and at the point-of-sale in stores. Today’s EMV (Europay, Mastercard, and Visa) chip technology uses encryption to generate a unique account number that’s only used for a single transaction. These advances make credit and debit cards reasonably secure from certain types of cybertheft.
Credit and debit cards are also safer and more hygienic than cash. Instead of handling money that’s been touched by hundreds of people, you just press a few buttons to complete a sale. New “contactless” cards use Near Field Communications combined with EMV technology allowing customers to “tap-and-go” for an even faster, more sanitary sale.
With these similarities between debit about credit cards in mind, we’re here to help clear up the confusion about the difference between a credit card and a debit card. By the end of this article, you should know which card would be best for you in specific circumstances.
What is a debit card?
A debit card pulls money from your checking account whenever you make a purchase. Using a debit card can help prevent overspending because you can only spend up to the amount you have in your bank account.
You can also use a debit card to pull money directly from your checking account at an ATM (Automated Teller Machine). Be sure to use ATMs provided by your bank to save a few bucks. Otherwise, you might pay additional fees for cash withdrawals.
If you have overdraft checking, transactions might clear if you don’t have the money in the bank to cover the purchase. But your bank may charge additional fees, called overdraft fees.
Some debit cards work a little differently than those tied to your bank account. If you use a pre-paid debit card like Bluebird from American Express, you load money onto the card from a bank account or payment service like PayPal or Venmo.
You can usually use prepaid debit cards anywhere you can use debit or credit cards. Most prepaid debit cards carry monthly fees and some charge per-use. On the other hand, most bank-issued debit cards linked to checking accounts don’t charge fees to use or carry the card, other than the fees your bank may charge to have a checking account.
Debit Card Advantages
Debit cards have many advantages over using cash or checks to make purchases. Along with the benefits of added safety and security, debit cards:
- Withdraw money from your account immediately, so you don’t have to wait for payments to clear
- Help you keep track of your spending through your online banking account
- Usually do not have fees associated with their use (except for prepaid debit cards)
- Are widely accepted at places that take Visa and Mastercard
- Make it easier to control your spending, as you can’t spend money you don’t have in the bank
Debit Card Drawbacks
As convenient as they are, it’s best not to use a debit card for certain types of transactions. Many car rental companies, for instance, don’t accept debit cards unless you’re willing to leave a large deposit.
If you’re checking into a hotel room, the hotel may put a “hold” on your card that exceeds the cost of your room. If you’re on vacation, you may not want to have that money tied up, especially since it can take a week or more for those funds to become available again.
Other drawbacks of debit cards include:
- High fees on prepaid debit cards
- Fewer opportunities to earn rewards for your spending
- No perks or benefits
- Using a debit card won’t help build your credit history or increase your credit score
What is a credit card?
A credit card allows you to make purchases by borrowing money from your credit card company. You can spend up to the credit limit on your card. If you try to make a credit card purchase and it would put you over your credit limit, the purchase may be declined or you may get hit with over-the-limit fees.
Once the bill arrives, you must pay the minimum amount by the due date. The bank calculates this minimum payment as a percentage of your credit card balance, including interest charges.
That’s right. Interest charges ae one of the major drawbacks to using credit cards. If you don’t pay the balance in full, you might pay interest on the amount you owe.
Certain promotional offers provide 0% interest for a limited time – typically 12 to 18 months – or on specific purchases. But if you don’t pay the balance before the introductory period runs out, you’ll have to pay the interest that would have built up over the prior months.
If you aren’t careful with money, it’s easy to overspend with credit cards, thinking you’ll just pay it off later. As interest charges add up and you still have to pay your regular monthly bills, you can get into trouble over-charging more than you can pay off each month.
Credit Card Advantages
Even with all this in mind, using a credit card for purchases has several advantages over debit cards. The best credit cards come with many perks and benefits. Some of these may include:
- Free credit score monitoring
- Identity theft protection
- Extended warranty protection (if you buy an item with a credit card, the bank may double the manufacturer’s warranty)
- Purchase price protection (if you find an item at a lower price within a certain amount of time, your credit card company will refund the difference)
- Cell phone insurance (when you pay your monthly bill using your card that has this benefit)
And let’s talk about the rewards.
Whatever your credit score, you can usually find a credit card with at least a modest rewards program. For every dollar you spend, you’ll receive a percentage (usually 1% to 2%, but sometimes up to 5% or more) in cash back or points you can trade in for merchandise, gift cards, a statement credit, or travel.
If you have a high credit score, you can qualify for top-tier rewards cards. Many people take vacations for free with rewards earned through rewards cards like Chase Sapphire Reserve or the American Express Gold card.
Very few debit cards today offer any kind of rewards.
Credit Card Drawbacks
Secure, easy to use, and offering lucrative opportunities to earn rewards, it may seem like credit cards are the hands-down best choice for anyone.
But if you have trouble controlling your spending, it’s not wise to rack up too much available credit by applying for multiple cards. You could be tempted to charge your cards to the limit.
Unless you have a 0% interest offer or pay your bill in full every month, credit card interest charges can add up quickly.
In addition to interest charges, credit cards have a few other drawbacks for consumers who don’t use them wisely and pay the balance in full when it comes due.
- Late fees if you don’t pay your bill on time
- High balances or late payments can lower your credit score
- Risk of overspending until you can’t make the minimum payments
- Your credit card could be declined if you spend over the credit limit
Debit cards let you conveniently make purchases using money in your checking account. They carry few fees and several advantages, including the ability to track your spending in real-time.
But if you learn how to leverage credit card rewards, you can earn cash back that can help you stretch your budget. If you only charge what you know you can afford and pay your bill in full each month, the right credit cards can unlock a whole new world of perks, benefits, and rewards.