Cash is great, but there are times when it’s inconvenient. You can’t use cash to make online purchases and you don’t want to carry around thousands of dollars if you have to make a large purchase.
Debit cards and credit cards are two convenient ways to make payments easily without having to deal with cash. While they do similar things, there are important differences between them that make them suitable for different situations.
What is a Debit Card?
You can use your debit card to spend money directly from the linked account. If you go to a store to buy something and pay for it by swiping your debit card, the merchant deducts the money directly from your checking account.
You can also use your debit card to make cash withdrawals from ATMs. Many banks operate their own network of ATMs or have joined larger ATM networks. If you use an ATM outside of your bank’s network, you typically have to pay a fee to make a withdrawal.
What is a Credit Card?
A credit card is a card you can use to access a line of credit that has been extended to you by a lender. While a debit card lets you easily access your own money, credit cards let you easily borrow money from a lender.
While debit cards typically come with any checking account that you open, you have to specifically apply for a credit card from a bank or other card issuer. When you apply, the lender will look at your credit score and financial information, such as your income, to decide whether to give you a card.
There’s no guarantee that you’ll qualify for a credit card if you have poor credit or can’t prove you’ll be able to pay back money you borrow.
If you’re approved, the lender will give you a credit limit, which is the maximum amount you’re allowed to borrow at one time. You can swipe your credit card at stores to pay for purchases, borrowing money from your credit card issuer.
Each month you’ll get a bill from your card issuer. If you pay the bill in full, you’ll pay no interest. You also have the option to pay only a portion of your bill. If you do this, you’ll pay interest on the remaining balance.
Many credit cards charge annual fees. They may also offer perks like rewards for each purchase you make, free hotel or airline status, or credits toward certain purchases.
Debit cards and credit cards both let you pay for purchases easily without handling cash, but accomplish that task in slightly different ways. Understanding those differences is essential to knowing when to use each.
1. Where the Money Comes From
Both debit cards and credit cards let you quickly and easily access money to pay for purchases. They also let you get cash from ATMs.
When you use a debit card, you’re taking your money directly out of your bank account.
One benefit of this is that it can make it easier to avoid spending too much money.
When you have cash in your wallet, you have the immediate and obvious feedback of watching your wallet get emptier as you spend money. When you use a debit card, you get to watch your bank account’s balance decrease with every purchase. This is an easy way to track the amount of money you’re spending and to make sure you don’t spend more money than you have.
With credit cards, instead of spending your own money, you’re spending the card issuer’s money.
Credit cards give you quick and easy access to a line of credit. If you need to borrow a small amount of money, going through an entire lending process — applying for a loan, working with an underwriter, and waiting for the lender to release the funds — can be a hassle.
If you have a credit card, you’re already approved to borrow up to your credit limit, so all you have to do is swipe your card to borrow some money to make a purchase.
This can be risky due to the high interest rates most credit cards charge, but in a pinch, easy access to credit can be useful to have.
There are costs related to using either a debit card or a credit card. The fees and other costs can differ depending which type of card you’re using and how you use it.
Debit Card Costs
Debit cards have an advantage here because they typically charge fewer fees than credit cards. Plus, there’s no risk that you’ll have to pay interest on your purchases with a debit card because you’re using your own money.
One of the most common fees you’ll have to worry about with debit cards is the overdraft fee.
While debit cards aren’t designed to let you borrow money in the way that credit cards are, some banks will let you spend more money than is in your account. This is called overdrafting your account.
For example, if you have $80 in your checking account and try to spend $100 using your card, your bank may approve the transaction. This causes an overdraft and puts your account balance at negative $20.
Many banks charge a fee for this service, further dropping your balance. In the example above, if your bank charges a $15 overdraft fee, your account balance will fall to negative $35. You’ll have to deposit $35 to bring your balance back to $0.
If your checking account balance is regularly low, you’ll want to keep a close eye on your balance to make sure you avoid overdrafts. You can also consider talking to your bank to ask about turning off overdraft service, which will let you avoid these fees. (If you don’t have overdraft protection, your $100 purchase would simply be declined if you only have $80 in your account.)
The only other fee you’ll have to worry about regularly with debit cards are ATM fees. Some banks will charge you a fee if you use an out-of-network ATM.
Credit Cards Costs
Depending on the card you use and how you use it, the costs of credit cards can get quite high.
One of the most common fees is the annual fee, which is a simple fee you have to pay for each year you have the card open. There are many credit cards that don’t charge this fee, but many premium rewards cards have high annual fees. The most premium cards can charge $500 per year or more. If you don’t make the most of the perks these cards offer, you’ll be paying the fee for no reason.
You might also pay fees to use a credit card in other situations. For example, if you want to send money to someone using a peer-to-peer app like Venmo, there’s typically a fee to use a credit card, whereas debit cards are free to use for this purpose.
On top of these fees, you also have to think about interest.
Credit cards are a tool for borrowing money. Borrowing money means paying interest. And credit cards are amongst the most expensive ways individuals can borrow money.
It isn’t unusual to see credit cards charging 10%, 15%, or even 20% or more in interest each year. If you consistently pay the full balance of your credit card before its due date, this won’t be an issue. However, if you carry a balance for even a month or two each year, you could wind up paying large amounts of interest.
3. How to Get One
If you don’t have a credit card or debit card, you’ll probably want to get one because they can make paying for large purchases much easier. They also facilitate online purchases.
The process for obtaining a debit card and credit card differ, and typically debit cards are easier to get.
How to Get a Debit Card
Getting a debit card these days is very easy for most people.
Most checking accounts automatically give you a debit card when you open an account. You don’t have to do anything special to get the card. It’ll show up in the mail soon after you open the account and make your initial deposit.
If you have a poor credit score or low income, you might find yourself unable to get a credit card at all, which means a debit card is much easier to get.
How to Get a Credit Card
To get a credit card, you have to apply for one. Credit cards are a tool for borrowing money, so you need to fill out a loan application if you want to get a credit card.
When you apply for a credit card, the credit card company will look at your credit history and your financial information to determine whether you’ll be able to pay back the money that you borrowed.
If you have poor credit or the credit bureaus don’t have a credit report for you at all, it can be hard to get approved for a credit card. The same is true if you don’t have a consistent income. You’ll need to build credit and show a source of income before you can qualify.
4. Fraud Protection
Online fraud is a growing problem. Someone putting fraudulent charges on one of your cards is more a “when” than an “if” scenario.
Both credit cards and debit cards offer fraud protection, but there are differences in how they work.
Debit Card Fraud Protection
Most banks offer fraud protection when you use a debit card to make purchases. If someone manages to steal your card information, your bank typically won’t hold you liable for those charges.
The problem is that your debit card gives the person holding it direct access to your bank account. If the fraudster manages to rack up $500 of spending before you catch the fraud and alert your bank, that money will already have left your account.
Most banks will reimburse you for the money you lose, but it can take time to go through the whole process of reporting the fraud and getting reimbursed. During that time, you’re out whatever money was taken out of your account.
The bottom line is that if you can’t afford to be missing that money for an extended period, the fraud protection might be too slow to make a difference before you find yourself in tough financial straits.
Credit Card Fraud Protection
Credit cards offer similar fraud protection to debit cards. However, there’s one big difference.
If someone steals your credit card info, they don’t get direct access to your bank account. That means that your money will be safe in your bank even as the fraudster racks up debt in your name.
You won’t be left without a penny to your name while you deal with your card issuer to get the issue resolved, which can make recovering from credit card fraud a bit easier than a similar situation with a debit card.
Some credit cards and debit cards offer rewards and other perks when you use them, which can make them appealing to people who want to get back some of the money they spend.
Debit Card Rewards
By and large, debit cards don’t offer rewards like cash back or airline miles. That means you’re losing out on some value by using a debit card over a credit card.
However, this trend might be changing. Some banks — especially online banks and fintech companies — have started offering rewards and other unique perks for using a debit card.
Credit Card Rewards
One of the top reasons to use a credit card is to earn rewards.
There are many types of rewards credit cards. Some offer simple cash back while others offer points, airline miles, or hotel loyalty points. Regardless of the rewards system a credit card offers, using your card regularly can help you earn significant benefits.
While some cash-back cards might offer just 1% on many purchases, many cards offer as much as 5% or more on certain types of purchases.
For example, the American Express Blue Cash Preferred pays 6% cash back on grocery store purchases. If you spend $5,000 per year on groceries, you’ll get $300 back this way, which is no small sum.
Depending on the card you use, you can save money, earn free flights for your next vacation, get a free hotel stay, or earn other rewards just for buying the things you were already going to purchase.
If you’re a particularly savvy cardholder, you might use multiple different cards based on where they earn the most rewards, letting you maximize your earnings.
The Verdict: Should You Choose Debit Cards or Credit Cards?
In the world of personal finance, there’s no single correct answer for everyone. Whether to choose a credit card or a debit card is no different.
In general, when used responsibly, credit cards are a better choice than debit cards. If you use a fee-free credit card and pay your balance in full every month, credit cards offer cash-back rewards and better consumer protections than debit cards.
However, if you struggle to budget or are worried about credit card debt, using debit cards or reloadable prepaid cards is likely a better idea. The interest charges on even a small credit card balance can be immense and it’s better to lose out on a small amount of cash back to avoid those costs.
You Should Sign Up For Debit Cards If…
Debit cards are a better fit if:
- You can’t qualify for a credit card. You get a debit card automatically when you open most checking accounts. If you can’t get a credit card for whatever reason, using a debit card is the right call.
- You use cash frequently. Debit cards let you withdraw cash from ATMs free of charge, assuming you use an in-network ATM. Credit cards charge cash advance fees if you want to make ATM withdrawals.
- You want help with budgeting. Budgeting with credit cards can be harder because you have to track your checking account and card balances. Overspending can be very easy to do. By comparison, when you spend money using a debit card, you only have to track your checking account balance.
You Should Sign Up For Credit Cards If…
Credit cards are a better fit if…
- You want to earn rewards. Most debit cards don’t offer rewards while many credit cards do. These rewards can be a great way to put some cash back in your pocket or earn free flights and hotel stays.
- You want consumer protections. Between the fraud protection and extended warranties most credit cards offer, they’re typically the better choice for large purchases.
- You want to build credit. If you’re trying to get a bigger loan like a mortgage or auto loan, using a credit card is a great way to start building credit.
- You need to borrow small amounts of money for short periods. Debit cards let you access your own money while credit cards give you access to a quick and easy line of credit. If you need time to move money between accounts before paying for something, credit cards give you an easy way to borrow money for the short term.
Both Are Great If…
Both debit cards and credit cards are excellent options if…
- You use a mix of cash and card transactions. There are advantages to paying for things with both cash and cards. If you use both regularly, keep a debit card around to get cash from ATMs and use your credit card for making card purchases.
- You mostly make everyday purchases online. If you’re shopping online, you need some kind of card to pay. Either type of card will get the job done.
Debit cards and credit both give you an easy way to spend money without having to deal with large amounts of cash. All you have to do is swipe your card to pay for products.
Debit cards give you easy access to your own money while credit cards let you borrow money from a lender. In general, credit cards offer lots of perks like cash back and consumer protections. However, you risk putting yourself into expensive credit card debt.
Most people will want to have access to both credit cards and debit cards as they work best in different situations.