Debit Card vs. Credit Card: What’s the Difference?

They may look the same, but they don’t always work the same

Reviewed by Katie MillerFact checked by Suzanne KvilhaugReviewed by Katie MillerFact checked by Suzanne Kvilhaug

Debit Card vs. Credit Card: An Overview

Debit and credit cards are commonly used worldwide, and although they look similar, there are major differences between them. For example, a debit card takes funds directly from your bank account, while a credit card is linked to a credit line that you can pay back later. Discover how debit and credit cards work and which financial situations one card might be better than the other.

Key Takeaways

• Debit and credit cards both allow cardholders to obtain cash and make purchases.
• Debit cards are linked to the user’s bank account and are limited by how much money is in the account.
• Credit cards provide you with a line of credit they can borrow against as needed and pay back later.
• Credit cards charge interest on the money the cardholder borrows unless it’s paid back within the grace period.
• Credit cards help build your credit history, while debit cards don’t.

How Debit Cards Work

Banks issue debit cards to their customers so they can make purchases or obtain cash without having to write a paper check or visit a teller at the bank. The card is linked to your checking account or sometimes a savings account.

How to Use a Debit Card

Debit cards can be used for withdrawals at automatic teller machines (ATMs) as well as for purchases at retailers in-store and online. When the card is used in a transaction, the money comes out of the linked account either immediately or after a brief interval. If you don’t have enough money in the account to cover the transaction, your card may be rejected.

PIN and Validation Codes

Debit cards have a unique personal identification number (PIN), which you input on the ATM keypad or the merchant’s point-of-sale terminal. However, with online transactions, you may be asked for the card’s validation code located on the back of the card as a security measure.

Debit Card Network

Most debit cards are linked to a processing network, such as Visa or Mastercard, allowing them to be used anywhere cards in that network are accepted. Although most debit cards link to your bank account, offline debit cards are not electronically connected to your account.

How Credit Cards Work

Credit cards are also issued by banks but require a separate application process. You don’t need to open or maintain a bank account with the company to apply.

How to Use a Credit Card

Rather than being linked to a bank account, credit cards have a credit line that the user can borrow against, usually up to a certain preset limit. Also, like debit cards, credit cards can often be used at ATMs to get cash, although cash advances on a credit card can be costly in terms of fees and interest.

How Credit Cards Charge Interest

Card issuers charge interest on the money the cardholder borrows, although cardholders can often avoid interest if they pay back their full balance within their card’s grace period.

Credit Card Network

Like debit cards, credit cards typically belong to a card processing network like Visa and Mastercard and can be used anywhere cards in that network are accepted. Private label or store credit cards are an exception since they are only valid at a particular retail chain.

4 Key Differences Between Debit and Credit Cards

In addition to the distinctions mentioned above, debit and credit cards have some other differences. Among the most important ones:

1. Debit cards won’t affect your credit score. Your credit score is a three-digit number reflecting your creditworthiness. Your credit score is based on information supplied to credit bureaus by your various creditors, including any credit card issuers. Consistently paying your credit card bills on time will help your credit score, while missing or late payments will hurt your score. However, debit cards don’t report to credit bureaus, so they won’t affect your credit score one way or the other.
2. Debit cards don’t charge interest. You won’t owe interest on your debit card because you aren’t borrowing money. However, if you have overdraft protection on your card and spend more than you have in your account, the bank will lend you the money to cover the difference, and you’ll face overdraft fees.
3. Credit cards often pay rewards. Many credit cards today have programs that reward cardholders with cash back or airline miles on their purchases. Some debit cards and checking accounts also pay rewards but tend to be less generous.
4. Credit cards have better consumer protections. Credit and debit cards are governed by different consumer laws. Your liability for fraudulent charges with a credit card is typically capped at $50 and sometimes $0. With a debit card, you could (in the worst-case scenario) lose all of the money in your linked accounts.

Which Is Better: a Credit Card or a Debit Card?

Both credit and debit cards can be handy when managing your personal finances, and can be nearly impossible to avoid using them in today’s financial world. Some merchants don’t accept cash or checks anymore.

Credit cards can be especially useful if you need to make a purchase or face a financial emergency and don’t have enough cash available in your checking account. However, credit cards can get you into financial trouble if you don’t pay down the balance and interest accrues and compounds, increasing your debt.

Conversely, debit cards can help you stay within your budget and avoid spending money you don’t have in your account. Since debit cards don’t involve borrowing money, you don’t get charged interest. However, it’s important to manage your money in your checking account because if you overspend with a debit card, you may not have the funds needed for critical expenses like rent or food.

If you’re trying to build or repair your credit history, a credit card used responsibly can help. In fact, some credit cards offer credit builder features, such as student credit cards, starter credit cards, and secured credit cards.

Important

It’s important to monitor your credit reports for suspicious activity and report any suspected fraud to the three major credit bureaus. Also, you can set up a free fraud alert with one of the credit bureaus to monitor unauthorized financial activity.

What Is an ATM Card?

An ATM card is a form of debit card that can only be used at automatic teller machines and not for purchases in stores or elsewhere.

What Is a Prepaid Debit Card?

A prepaid debit card is loaded with a specific amount of money but not linked to a bank account. Prepaid debit cards can often be reloaded with more money and used repeatedly. Gift cards also work like prepaid debit cards, although they may only be accepted by a particular retailer or chain and often aren’t reloadable.

How Long Is the Grace Period on a Credit Card?

The grace periods on credit cards are usually at least 21 days long and sometimes longer.

The Bottom Line

Debit and credit cards allow you to make purchases and withdraw cash. However, debit cards are linked to your bank account, limiting the size of your financial transactions by the amount of funds in your bank account. Conversely, credit cards are not linked to your bank account. Instead, credit cards provide you with a line of credit to borrow funds for purchases and cash advances. In return, credit card companies charge you interest on the borrowed money.

Read the original article on Investopedia.