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While credit and debit cards look the same at first glance, their features and benefits are very different. Knowing when to use each type of payment card can help you in your financial life, so keep reading to learn about the differences between debit and credit cards and make informed spending decisions.
What is a credit card?
A credit card is simply a line of credit that an issuer gives you. You can use it to borrow money to buy things, transfer balances from other credit cards, or, in dire circumstances, get a cash advance. When you receive a credit card, you agree to return this money, along with any interest that may be charged in the future.
When you make a purchase with a credit card, you use a portion of that card’s available credit. The amount the bank allows you to borrow at one time (also known as your credit limit) depends on your credit history and credit score.
You will receive an invoice once a month and you will need to make at least the minimum payment. If you don’t do this in a timely manner, you will likely receive a fine and your credit history will suffer.
If you pay off the entire balance every month, you won’t have to pay any interest. However, if you only pay off a portion, you will earn interest on any amount of your balance that you have not paid.
Credit card interest rates are high, with the average credit card rate currently exceeding 16%. You may end up paying a lot of interest depending on how much of your balance you carry over from month to month.
Credit card benefits
- Build your credit scoreA: If you use them responsibly, credit cards can help you improve your credit score. Recording timely payments will steadily improve your credit score. If you pay your bill on time, your account should remain stable, but be careful with your balance. This can increase your credit utilization ratio (the amount of credit you use divided by the total amount available to you), which is 30% of your FICO score.
- Improve Security: Credit cards offer a more secure way to shop than debit cards. If someone steals your debit card number, they can immediately withdraw funds from your checking account. Fraudsters can also steal your credit card information and use it to make unauthorized payments on your behalf, but they don’t have direct access to your money, giving you time to dispute the payments. In addition, most major credit cards have a zero liability policy.
- Earn rewardsA: Using credit cards can help you accumulate valuable rewards like cash back and travel points, which most debit cards can’t do.
Credit card disadvantages
- High interest rates: If you don’t pay your credit card balance in full every month, you’ll be stuck paying interest, which can cause your debt to skyrocket.
- FeesA: Credit cards usually charge late fees. In addition, many of them charge an annual fee just for their use.
- Can lead to debT: If you borrow more than you can afford to pay, you can end up with a pile of credit card debt that keeps growing thanks to those expensive interest payments. And this debt can hurt your credit history.
What is a debit card?
A debit card is a payment card linked to your checking or savings account that “draws” money directly from that account when you use it to buy something. You can also use your debit card to withdraw money from your checking or savings accounts through ATMs.
One good thing about a debit card is that it doesn’t allow you to spend more than what is currently in your bank account. On the other hand, it lacks certain perks that credit cards have.
For example, because the money comes directly from your account, banks don’t report your activity to credit bureaus, so using a debit card won’t help you get a loan.
Debit cards are also more risky than credit cards. Remember: if a hacker steals your information, he can empty your bank account. You may end up getting your money back after reporting a crime, but this can take time.
Debit card benefits
- Helps stop overspending: Delaying a credit card payment by 30 days or more can cause your credit score to plummet, and if you roll over from month to month, high interest rates can wreak havoc on your finances. If you’re having trouble budgeting, paying bills on time, or overspending, it might make sense to pay for your purchases with a debit card.
- Good for small purchasesA: If you don’t like to carry cash around with you, but want to be able to make small purchases without using a credit card, a debit card might come in handy.
Disadvantages of a debit card
- No awardsA: Debit cards don’t usually offer rewards, so you can’t earn cashback, points, or miles with them.
- Can’t build my credit scoreA: Because debit card purchases use your own money and not credit, using a debit card will not improve your credit score.
- Less secureA: Debit cards are directly linked to your bank account, so they may be less secure than credit cards.
Key differences between credit and debit cards
Keep in mind the most important differences between the two types of cards:
- Cash versus loanA: The most important difference between a debit card and a credit card is that a debit card uses your own money when you buy things, while a credit card allows you to borrow money for every transaction you make.
- Opportunity to get rewardedA: Another big difference is that credit card issuers usually offer valuable rewards to their cardholders, while debit cards usually don’t come with any flashy perks.
bottom line
There are advantages and disadvantages to using debit and credit cards. Which one you choose to use will depend on the purchase you are making and your financial preferences. Now that you know what the benefits of each payment method are, think before you pay so you can make strategic spending decisions.
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The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.