Difference Between Credit Card and Debit Card

Have you ever used the term “credit card” when you actually meant your debit card? What about being unsure of which card to use? If so, you’re not alone! Credit cards and debit credits cards look almost identical and offer similar services. So what’s the difference between credit and debit cards? Read on to learn about how they differ, plus the pros and cons of each.

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What Is a Debit Card?

If you already have a bank account, you probably already know a little about debit cards. Your debit card is linked directly to your bank account and comes with its own secure pin number. You use a debit card (and the pin) to withdraw cash at bank branches and ATMs and to make purchases. When you make purchases with a debit card, that amount is held in your bank account. Within a couple of days, that amount is withdrawn from your account and sent to the merchant.

Usually, you can only use the funds that exist in your bank account at the time of your purchase or withdrawal. It makes sense that you can’t spend money you don’t have. But sometimes you can sign up for overdraft protection. When you overdraft your account, that’s when you draw more than your account holds. Overdraft protection allows you to make that purchase or withdrawal, but does trigger some bank fees.

Pros and Cons of Debit Cards

Without the rewards and perks that credit cards tend to offer, debit cards usually come with low (or no) fees. Some bank accounts may have a minimum balance requirement. However, since purchases and withdrawals go through almost immediately, there’s no way for you to carry over a balance owed from statement to statement. This could be ideal if you have trouble making payments on time, as you’ll avoid the possibility of falling into debt.

It’s important to note that debit cards don’t contribute to your credit history or credit score. This is because you’re not spending on a line of credit, with the option of repaying at a later date. Debit cards provide a pretty straightforward way of spending and controlling your spending. Just be sure to track your purchases so you don’t end up with any overdraft fees or declined cards.

What Is a Credit Card?

Credit cards allow you to buy things in the present and pay for them in the future. When you use a credit card, you’re essentially borrowing money against a line of credit. You receive a monthly bill from the card issuer that itemizes your purchases. This statement also provides how much you owe. This usually includes the total amount and a minimum amount. This minimum amount is the least you can repay to avoid late fees. Whatever you don’t pay gets carried over to the next statement cycle and accrues interest.

Pros and Cons of Credit Cards

Credit cards often come with rewards programs that offer big earnings whether they’re airline miles or cash back. Many credit cards come with added perks, too, like rental car insurance or extended warranties. Usually credit card issuers offer credit card fraud protection and resources in the case of identity theft. Plus, spending on credit allows you more time to catch fraudulent purchases before you actually have to pay for them. Spending on credit also contributes to your credit score. This can prove to be a pro or a con depending on your spending and repayment habits.

Due to their many perks, credit cards tend to come with annual fees to cover the costs of these benefits. You also have to keep an eye out for other fees that crop up for late payments, foreign transactions, balance transfers and more. Credit cards do lack the ease of withdrawing some quick cash from the ATM. While you can sometimes withdraw cash, it’s still not your own bank account funds. This is called a cash advance and often comes with its own unwelcome fees and interest.

Additionally, some cards, like American Express, aren’t accepted by all merchants, meaning you can get turned away at the register if you don’t have another payment method on hand.

	Credit Card	Debit Card
Annual Fee	While many cards don’t have an annual fee, others can charge fees of hundreds of dollars Some credit cards may waive the annual fee for the first year of ownership	None
Payment Method	Drawn on a line of credit You repay your card issuer at the end of each statement cycle	Funds withdrawn almost immediately from your personal bank account
Fees	Potential annual fee Fees triggered by cash advances, balance transfers, foreign transactions and more	Fees triggered by overdrafts, foreign transactions, foreign ATMs and more
Earns rewards?	Many credit cards offer rewards like miles, points, cash back, etc.	No
Contributes to credit report?	Yes	No
How easily can I get one?	Your credit score and credit history, among other factors, determine your eligibility for each credit card	As long as you have a checking account

Right off the bat, credit and debit cards differ in the way you draw funds when making a purchase. When you use a debit card, the money comes directly from your checking account, drawing on money you already have. When you use a credit card, it’s like the credit card issuer makes the purchase for you, which you later have to repay. However, many people find both types of cards provide a more convenient way to pay than cash or a personal check.

Debit cards automatically come with your checking account so you can withdraw cash and make purchases. On the other hand, you have to apply for credit cards. Your eligibility for a credit card will depend largely on your credit history. If you don’t have any credit history, you can still apply for certain credit cards and build credit at the same time. Generally, the more benefits a credit card carries, the higher the required credit score will be. This points out another difference between credit cards and debit cards. Credit cards often come with a ton of perks like cash back, access to airport lounges or business discounts, while debit cards don’t.

Should I Use a Credit Card or a Debit Card?

Now that you know how each card type works and their differences, you should know when to use each card, if at all. For starters, debit cards are the safer option. They don’t pose the risk of falling into credit card debt. So if you’re worried about your ability to pay a credit card bill in full and on time to avoid owing money, best to stick with your debit card for now. If you have a track record of missing payments and accruing debt, it’s also best to stick with a debit card until you’re sure you can jump back on the credit card wagon.

Credit cards are a great tool, not only because they build credit and offer fun perks. Credit cards can be great for big purchases like when you’re furnishing a new apartment. That way, you can spread out your spending over a few cycles. Of course, you have to be diligent about paying off as much as possible and always paying on time.

The Bottom Line

The key difference between credit and debit is in the way you’re spending money. Your debit card pulls from your own funds almost immediately whenever you withdraw or make a purchase. Credit cards allow you to make a purchase, but pay for it later. Each has its pros and cons, although you do have to exercise more discipline when using a credit card. Ideally, when you’re ready, you’ll have a debit card and a credit card to balance out your finances while building some credit for the future.

Tips for Spending on Credit

Perhaps this article convinced you that you want to get a credit card. But are you truly ready? It’s important that you take on only what you can manage. That way, you won’t end up overwhelmed by your statements. That’s how people fall into credit card debt. Make sure that you trust yourself to make payments in full and on time so you can avoid owing more money and debt.
If you’re already looking to pay off some debt, maybe you need to check out a balance transfer card. These cards offer a limited period of time where balance transfers don’t accrue any interest, leaving you time to pay off a debt without falling further into debt.