The Difference Between Debit and Credit Cards
Although they may appear similar, debit and credit cards operate in different ways.
Credit card vs. debit card, To pay for a purchase made with a debit card, money is automatically deducted from your bank account.
Credit cards allow you to borrow money to purchase goods and then pay them off later. You will receive a bill at the end of each billing cycle for all purchases and any interest or fees.
Each card type is suitable for different situations and people.
What is a debit card?
A debit card can be used to pay for goods and services, as well as alternative cash. You might hear the two main types of debit cards you see: bank debit cards (which you can open when you open a debit account) and prepaid cards. Prepaid cards may not be considered debit cards, and they might not work the same.
Bank debit cards
Most banks and credit unions will issue a debit card when you open a checking or savings account. You can use the card to make purchases. To pay for the purchase, your account automatically debits the amount of the item purchased from your card.
Although they are sometimes called debit cards, prepaid cards don’t have a bank account. They work differently from true debit cards. Instead, you load money on the card and then use it to make purchases.
If your balance drops, you can usually add money to the card to make it more useful. You can purchase prepaid debit cards online and in-store. Prepaid cards are not debit cards and don’t offer the same protections.
The pros and cons of debit cards
Do you like the idea of not needing to go to the bank or ATM to get cash when you want to purchase something? Debit cards are convenient and offer many benefits.
- A debit card is a great way to control your spending. You will need to have money in your bank account to use the card for payment.
- To monitor debit card activity, you can set up alerts.
- Your purchases will not be subject to interest.
- Your debit card can be used to withdraw cash at ATMs or receive cash back at a point-of-sale when you make a payment.
Cons of debit cards
There are many things to love about using a debit card, but there are also some things you need to be aware of.
- There may be fees. You may be charged fees for debit cards issued by banks and credit unions. These include ATM fees outside of your network, overdraft fees, and fees for using a PIN to make transactions. You might need to pay to activate your prepaid card or to withdraw money from an ATM.
- A debit card will not help you build a credit history. This is one of the ways you can improve your credit scores.
- Fraudulent charges may make you liable for your debit card. If your debit card is stolen or lost, you can be held responsible for any unauthorized charges. You must report the incident within two business days. You could end up paying all or part of the charges if you delay.
- Prepaid cards are not debit cards, even though they are sometimes called debit cards. Prepaid cards won’t be able to provide the same protections as debit cards. However, a recent rule by the CFPB aims at increasing consumer protections for a prepaid card, including in the case of your card being lost or stolen. If you are looking for some protection, you should make sure you have read the terms and conditions of any prepaid card that you purchase and completed the verification and identification process.
What is a credit card?
Credit cards offer a line credit that allows you to borrow money to purchase goods. You can also get cash advances and balance transfers with many credit cards. You agree to repay the credit company for the amount borrowed and any interest charges.
The pros and cons of credit cards
Credit cards have many benefits that debit, and cash cards don’t.
- The Fair Credit Billing Act reduces your liability for unauthorized charges. Some credit card companies offer $0 liability policies if your card is stolen or lost.
- Credit cards can help you build your credit history.
- You can earn cashback on your Rewards Card.
- Even if you don’t have enough cash, you can still use your credit card to pay for emergency expenses.
Cons of credit cards
There are many benefits to credit cards. However, there are also some drawbacks.
- You could end up with credit card debt if you aren’t careful.
- You’ll be charged interest if you fail to pay your balance on time and in full at the end of each billing cycle.
- There may be fees. Common fees include balance transfer fees, late return payments, cash advance fees, and foreign transaction fees.
Credit vs. debit: Which card is right for you?
Your spending habits and how you intend to use the card will determine which type of card is best for you.
A debit card might be better if you fear you will be tempted to spend too much on your credit card. A credit card is a good choice if you are used to following a budget and can afford to pay the balance in full each month.
Perhaps you prefer to use a debit card for daily purchases but keep a credit card on hand for emergencies.
The card you choose to use in a particular situation depends on how much cash you have and how you manage your finances. It doesn’t matter which type of card you choose; it is important to know how it works and your payment responsibility.