Debit cards and credit cards may look alike, but they work differently. You can use either to quickly and easily pay for things, whether you’re buying online or in person. You can even get cash with either form of plastic. But they serve different needs, and it’s critical to know where each option excels.
Note
To maximize your security and avoid hassles in your bank account, it’s probably best to use a credit card for everyday spending. But you need to pay off the card every month to avoid interest costs, and annual fees may make credit cards less appealing.
Potential Fees
At first glance, fees might make you favor debit cards as you evaluate debit vs. credit cards. The worst fee you may find in a typical debit card is a potential POS fee—charged when you use your PIN number for purchases with a retailer. While the tide is shifting away from banks charging those fees, you may still encounter them. Prepaid debit cards are another story altogether because they are not pure, bank-linked cards. Some prepaid cards have created a reputation for charging high fees, although some cards keep charges to a minimum.
Credit cards charge interest, but you can avoid those charges if you pay off your card every month. You may also face annual fees with credit cards, but not all cards charge fees.
Liability Risk
Consumer protection varies when it comes to debit and credit cards. Lawmakers place debit cards and credit cards into different categories. But to make debit cards more attractive, some issuers offer a similar level of protection that makes debit cards almost as safe as credit cards—but there are still differences. The biggest problem may be that you expose your checking account to the world with a debit card (see below).
Note
With credit cards, your loss is limited to $50 worth of fraudulent charges. But with debit cards, you must report those errant charges within two days to limit your loss to $50. If you wait too long, you may be fully responsible for somebody else’s purchases.
Card Blocking
When you use plastic at some retailers (gas stations, in particular), the merchant may “block” your card. That means they pre-authorize your purchase and reserve money in your account—typically $50 to $100. They don't know exactly how much you'll buy, but they want to make sure you can afford it. If you only buy $20 worth of gas, merchants don’t release the remaining amount immediately—that process can take several days. During that time, you’re unable to use the blocked money, which might cause you to bounce checks or incur overdraft charges.
There is no difference in how retailers block debit vs. credit cards. But pre-authorizations on your credit card use a portion of your credit line—they don’t prevent you from spending money you have in your checking account.
Opening Your Account to the World
Your checking account holds liquid cash that you're planning to use soon. When you use your debit card, you put that cash at risk. Any retailer can make a mistake and withdraw too much money, leaving you short on funds (at least for a while). Furthermore, you might use your PIN all over town to make “debit” purchases and ATM withdrawals. If that number (intentionally or accidentally) gets into the wrong hands, scammers have an easier time getting to your account. Again, you might get your money back after you prove it was a fraud, but that takes time and energy.
Overdrafts and Rubber Checks
Using your debit card as you run around town doing errands can create bounced checks and overdraft costs. Even a $4 sandwich can create a $40 overdraft charge. Why not just use credit? Even a $60 annual fee on your credit card is a small price to pay for knowing you won't bounce checks and start a chain reaction of overdraft fees.
Not Accepted Everywhere You Want to Be
Most of the time, nobody will know or care whether you're using a debit card or a credit card. However, some companies treat these cards differently. Rental car companies have been known to demand a real credit card and deny debit cards when you try to reserve a vehicle. Their justification may be that a credit card implies a minimum level of creditworthiness and responsibility.
Giving up Free Money
A common reason for using debit cards over credit is that you're spending money you actually have—and avoiding interest charges from the credit card company. But if you have enough money for your purchase, why not use a credit card and take advantage of the 30-day grace period, any cashback bonus, and build more credit history? As long as you don't carry a balance on your credit card—and you presumably should not have a balance if you use the reasoning of paying with a debit card instantly—then you should keep disciplined to pay off all your purchases on your credit card monthly, without paying interest.
Note
To maximize interest earnings at your bank, keep yourcash in a high-yield savings account. Then, pay off the card balance every month to avoid any interest charges from your card issuer.
FAQs
Debit cards allow you to spend money by drawing on funds you have deposited at the bank. Credit cards allow you to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash.
What are the main differences between debit and credit cards? ›
Debit cards are linked to the user's bank account and limited by how much money is in there. Credit cards provide the user with a line of credit that they can borrow against as needed and pay back later. Credit cards charge interest on the money the cardholder borrows (unless it's paid back within the grace period).
What are 3 things that credit and debit cards have in common? ›
What are the similarities between a Credit Card and Debit Card?
- Both types of cards allow you to withdraw cash instantly from an ATM. ...
- Both credit and debit cards allow you to shop online quickly, safely and securely. ...
- They are both a fast and convenient way to undertake financial transactions.
A debit card requires you to have the cash available in the account; a credit card does not. How is a debit card like a credit card? They both can have the Visa or MasterCard logo, and a debit card can be swiped and require a signature like a credit card.
Why is a credit card better than debit? ›
Credit cards are safer to carry than cash and offer stronger fraud protections than debit. You can earn significant rewards without changing your spending habits. It's easier to track your spending. Responsible credit card use is one of the easiest and fastest ways to build credit.
What are 5 advantages of credit cards? ›
Credit card benefits
- Rewards such as cash back, miles, or points.
- Protection against fraud.
- Increased purchasing power.
- Not linked to a checking or savings account.
- Putting a hold on a rental car or hotel room.
- Building credit history.
Debits are money going out of the account; they increase the balance of dividends, expenses, assets and losses. Credits are money coming into the account; they increase the balance of gains, income, revenues, liabilities, and shareholder equity.
What is the difference between a debit and a credit transaction? ›
In short, debit and credit transactions are processed differently in the background. A debit transaction using your PIN (personal identification number), is an online transaction completed in real time. A credit transaction using your signature is completed offline.
What are 3 pros and 3 cons of credit cards? ›
Biggest Pros and Cons of Credit Cards
| Rank | Top 10 Credit Card Pros | Top 10 Credit Card Cons |
|---|
| 1 | Credit Building | Overspending and Debt |
| 2 | Convenience | Fraud |
| 3 | Rewards | Fees |
| 4 | Pay Over Time | Fine Print |
6 more rowsCredit Cards and Debit Cards look similar in appearance, but both function differently. While a credit card is a short-term loan extended to you by the card issuer that involves repayment, a debit card is a means to spend money out of your savings/current account.
Major credit cards are any cards that belong to one of the big four credit card networks: Visa, Mastercard, American Express and Discover. That's what stores mean by “we accept all major credit cards.” A major credit card will almost always show the logo of its network on the front. In some cases it'll be on the back.
What is the difference between the debits and credits quizlet? ›
Debit just means the left side of the double entry accounting, Credit just means the right side of the double entry accounting. When you hear your banker say, "I'll credit your checking account," it means the transaction will increase your checking account balance.
What are debit and credit cards also known as? ›
The correct option is B plastic money. The popular name for debit and credit card is known as plastic money.
What is the most important difference between credit and debit cards? ›
Debit cards allow you to spend money by drawing on funds you have deposited at the bank. Credit cards allow you to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash.
Which is safer a credit or debit card? ›
Credit cards often offer better fraud protection
With a credit card, you're typically responsible for up to $50 of unauthorized transactions or $0 if you report the loss before the credit card is used. You could be liable for much more for unauthorized transactions on your debit card.
What are the disadvantages of a credit card? ›
What are the disadvantages of using a credit card? Credit cards have a few disadvantages, such as high interest charges, overspending by the cardholders, risk of frauds, etc. Additionally, there may also be a few additional expenses such as annual fees, fees of foreign transactions, expenses on cash withdrawal, etc.
What is one of the biggest problems with using a debit card? ›
Here are some cons of debit cards: They have limited fraud protection. According to the Federal Trade Commission, if your debit card is stolen and you notify your bank within two days, you could be responsible for up to $50 of any fraudulent charges.
How to identify credit card and debit card? ›
You can't tell whether a card is associated with a debit or credit account based on numbers alone. Still, you can usually find that out by looking at the card as most of them have a “credit” or “debit” label somewhere on the card.
What are the advantages of a debit card? ›
Debit Cards make transactions fast, easy and convenient to use. Debit Cards have the ability to give you cash. They double up as ATM cards and allow you to withdraw money from an ATM. Therefore, working as an emergency fund for you.
Is debit and credit always the same? ›
When recording a transaction, every debit entry must have a corresponding credit entry for the same dollar amount, or vice-versa. Debits and credits are a critical part of double-entry bookkeeping.
