The Differences Between Debit Cards and Credit Cards

Understanding the Differences Between Credit and Debit Cards

Every time you make a purchase using plastic, whether at the grocery store, retail outlet, or a gas pump, you are most likely prompted to choose your preferred payment method: debit or credit card. Other than the fact that one requires a PIN (your four- to six-digit personal identification number) and the other often requires a signature, you may wonder if it even matters which one you choose. Since both typically carry the logo of a major credit card company, what is the difference, anyway? Maybe more importantly, are there any benefits to using one type of card over the other?

While the cards may be similar in appearance, they are fundamentally different – and they work in almost opposite ways. In the simplest terms, a credit card is an instrument of debt while a debit card is something like a digital check. In other words, one card adds to your credit card debt, and the other reduces the balance in your checking account or bank account.

Credit cards and debit cards pull from two different sources and are subject to different charges.

Credit Cards:

Pull funds from a line of credit; you borrow money to make the purchase.
Have an established predetermined credit limit.
Do not use your personal funds.
Add the charge amount to the outstanding balance owed to a credit card issuer.
Bill out balances monthly through a credit card statement.
Charge credit card interest on any unpaid balances you carry over to the next month.
Carry variable interest rates that can be extremely high.
Can be used at ATMs for cash advances, which often incur additional fees.
Sometimes offer credit card rewards such as cash back or travel miles.
Offer more protection to the consumer if lost or stolen, including zero liability protection for unauthorized charges.
Have a grace period for payments, typically 21-25 days after the billing cycle ends.

Debit Cards:

Draw funds directly from your personal checking account or bank account; you spend your own money to make the purchase.
Don’t result in you owing an outside party.
Place a hold on your funds immediately.
Withdraw the funds from your account within 1-3 days.
Do not charge interest.
Can incur overdraft fees and/or account service fees.
Can be used at ATMs for withdrawals from your personal account.
Offer some protection to the consumer if lost or stolen, but typically less than credit cards.

There are benefits to using both kinds of cards.

Choosing the type that is right for you depends on your buying and debt repayment habits. Savvy consumers can take advantage of credit card rewards programs, but debit cards can be helpful for sticking to a budget. The best advice here is: know thyself and your financial goals.

Credit Card Advantages:

If you regularly pay your credit card bill in full at the end of each month, you might be able to take advantage of rewards programs offered by many credit card companies. Program offers, like for instance, travel rewards or airline miles – can be a great way to help pay for that family vacation. Other programs offer cash back, and those savings can really add up over time.
Credit cards can help build credit history and improve your credit score when used responsibly, contributing to your credit report.
Many credit cards offer purchase protections and extended warranties on items bought with the card.
Some credit cards provide travel benefits such as travel insurance or airport lounge access.
Secured credit cards can be a good option for those looking to build or rebuild credit.
Balance transfer options can help manage debt by moving high-interest balances to cards with lower rates.

Credit Card Disadvantages:

If you are not in the habit of paying off credit card balances every month, increased credit card usage could end up costing you more in interest charges than you would gain from the incentive program.
Credit cards can lead to debt accumulation if not managed properly.
Some credit cards come with annual fees or high interest rates.
Late payment fees can be substantial and negatively impact your credit score.
The temptation to make only the minimum payment can lead to long-term debt.
Credit card fees, such as balance transfer fees or foreign transaction fees, can add up.

Debit Card Advantages:

If you need a little help staying within your budget, debit cards are a good way to do that since you can only spend the amount of money in your checking account or bank account.
Debit cards don’t accumulate debt or charge interest.
They’re widely accepted for both in-store and online purchases.
Many debit cards now offer contactless payment options for quick transactions.
ATM withdrawals are usually free when using your bank’s ATM network.

Debit Card Disadvantages:

Your bank may offer a limited amount of overdraft protection, a benefit that ensures they will cover any purchases you make, up to a certain dollar amount, even if you have insufficient funds to pay. This can save you from an embarrassing moment in the grocery check-out line, but it does come at a cost. Any funds deposited into your account will first go to cover the overdraft before adding to your available balance, and overdraft fees are typically in the neighborhood of $35 and up per transaction.
Debit cards offer less fraud protection compared to credit cards.
Using a debit card doesn’t help build your credit history or contribute to your credit report.
Some debit cards have daily spending limits, which can be inconvenient for large purchases.

Consumer protections on credit and debit cards are different.

Be sure to read the protections as spelled out by your credit card company or financial institution regarding theft, loss, and chargebacks—a specific type of purchase protection for goods if they were never received, or received but damaged or materially different than advertised. In general, the basic federal protections for credit card losses are much more comprehensive than those for debit cards.

Credit Card: You are only held responsible for up to $50 of unauthorized transactions if your actual credit card is lost or stolen. You are not responsible for any unauthorized purchases if your credit card number is stolen.

Debit Card: You are only held responsible for up to $50 of unauthorized transactions if your card is lost or stolen and you report it lost or stolen within 2 business days. If you miss this deadline, you can be held responsible for up to $500 of unauthorized transactions if you report your card lost or stolen within 60 days of the date your statement was mailed to you. If you fail to report the card lost or stolen within these timeframes, you lose these protections and can be held responsible for the full amount of any unauthorized charges.

Why do debit cards have credit card company logos on them?

Debit card transactions are made using the same networks owned and used by Visa and Mastercard. If your bank-issued debit card has a credit card company logo on it, that card can be used to make purchases anywhere that accepts Visa or Mastercard. Those retailers simply pay the credit card companies a small fee for the use of their payment processing network.

If you still have questions about the differences between credit cards and debit cards, or want to talk to someone about debt management and repayment, please do not hesitate to give us a call at DebtGuru.com. Our friendly staff is here to help you every step of the way on your quest for financial knowledge and effective money management.

Remember, whether you choose to use a credit card or a debit card, responsible financial management is key to achieving your financial goals. Understanding the pros and cons of each payment method, including credit card terms and features, can help you make informed decisions about your spending and credit utilization. Consider factors such as rewards programs, monthly payments, and the potential for credit building when choosing between credit and debit cards.

In today’s digital age, both credit and debit cards can often be linked to digital wallets, providing additional convenience and security for your transactions. Whichever option you choose, always review your statements regularly and stay informed about your card’s features and any associated fees to make the most of your financial tools.