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At first glance, there’s not much difference between credit cards vs. debit cards. They look the same, and you use them both to pay for goods and services. In truth, however, there are some important differences between credit and debit cards. Here's what you need to know.
Credit Cards vs. Debit Cards – What Are the Pros and Cons of Each?
In the table below, you’ll see the headline credit cards vs. debit cards pros and cons that should give you an idea of when to use a credit or debit card. We’ll dive into more detail below.
|Credit Card||Fraud & purchase protection|
Buy now, pay later
Builds credit rating
|Interest charged on unpaid balances|
Easy to rack up debt
Sometimes come with annual fees
Interest-bearing cash withdrawals
|Debit Card||Only use the funds you have|
Typically no fees
No interest on purchases
Interest-free ATM withdrawals
|Lower fraud & purchase protection|
No line of credit
Fewer purchase rewards (if any)
How to Identify a Credit Card vs. Debit Card
Superficially, credit cards and debit cards look the same. They’re both plastic rectangles sporting the same set of numbers. It can be hard to know how to identify a credit card and a debit card.
In most cases, both credit and debit cards have a payment network logo in the bottom right corner of the front; usually Visa or Mastercard. Many cards will have ‘debit’ or ‘credit’ written above the logo – or incorporated into the logo itself – to indicate which it is.
If it doesn’t say on the card itself, the other approach for how to identify a credit card and debit card is to log in to your online account. Where the information is displayed will depend on your provider, but it will doubtless be there somewhere.
How Do Credit Cards Work?
So, how do credit cards work? The major difference between a credit and debit card is that credit cards are a form of borrowing. When you buy something on a credit card, the card issuer pays – not you. In effect, your credit card company loans you the money to pay for your coffee, groceries, or gas.
If you buy something on day one of your billing cycle, that loan is interest-free for nearly two months. Credit cards usually bill after one month and give you 3-4 weeks to pay. If you fail to pay within this period, the balance begins to incur interest – this is how the card issuer makes money (along with taking a cut of the transaction from the merchant.)
However, pay your bill on time every month, and you can reap all the rewards with none of the interest. And those rewards can really add up. For example, you could earn up to $360 in the first year of using Blue Cash Preferred® Card from American Express to buy groceries.
Plus, establishing a record of repaying debt builds up your credit rating, making it easier to take out larger loans or a mortgage in the future.
How Do Debit Cards Work?
So, how do debit cards work? The headline difference between a debit and credit card is that a debit card draws on funds available in your checking account. Rather than borrowing from the card issuer, you pay out of your own pocket. There is essentially no difference between using a debit card and cash – you just skip a trip to the ATM.
Debit cards usually don’t offer the same kind of payment rewards as credit cards because they’re not as profitable for the banks that issue them. They’re more of a utility that enables you to access the money in your bank account.
Do debit cards have any advantages? Because debit cards aren’t a form of borrowing, they’re available to anyone with a checking account. Credit cards are subject to credit checks and can be refused based on your status. However, that also means that using a debit card doesn’t establish a credit history and won’t help you borrow in the future.
Debit Card vs. Credit Card Security
Credit and debit card fraud accounts for 45% of identity theft in the U.S., costing Americans $10.2billion in 2022.
Fraud protection has always been one of the major benefits of a credit card. By law (the Fair Credit Billing Act), credit card users are only liable for up to $50 of unauthorized transactions. Your credit card company is obligated to investigate if you send a written request within 60 days from when your credit card statement was issued.
The law is less robust for debit card security. It's also much more complicated. According to the Electronic Funds Transfer Act, which governs debit card fraud, your potential liability depends on whether your card is missing (i.e., lost or stolen). If your card was lost or stolen, your maximum liability depends on how long it took you to notify your financial institution.
- Reported within two business days of learning the card is missing: $50 liability limit
- Reported after two business days of learning the card is missing: $500 liability limit
However, there is another reporting requirement. Consumers have 60 days from the date the financial institution issues the statement to report unauthorized transactions. Note that this requirement applies regardless of whether the debit card is missing. You can read the rules at the CFPB website.
This security imbalance is changing. Many debit card issuers are implementing voluntary fraud protection, such as the Chime debit card, which features Visa Zero Liability – shielding you from any unauthorized charges.
When to Use Credit and When to Use Debit
Taking all the above into account, let’s look at when to use a debit vs credit card and vice versa.
When to use a credit card
In most cases, credit cards are the better bet. For day-to-day use, they offer greater protection against unauthorized transactions. You can earn cashback as you spend. There are even situations where you can only use a credit card, such as renting a car.
When to use a debit card
Do debit cards have any advantages? Absolutely. Credit cards are the easiest path to debt. It’s common sense to pay down your balance every month, but the temptation to carry over and spend beyond your means can be hard to resist. Debit cards avoid temptation in the first place.
Debit cards are also essential for withdrawing cash. While credit card purchases usually don’t incur interest until after the payment date, a cash advance on a credit card incurs interest charges immediately. So if you need cash, a debit card is the clear winner.
Can a Credit Card Be Used as a Debit Card?
Many people think of credit cards as for emergency use only, fearful of incurring interest or spending more than they can afford. But can a credit card be used as a debit card?
Aside from ATM withdrawals, credit cards can more than replace debit cards in daily use. As long as you pay your bill every month, the extra protection and spending rewards make credit cards a better solution for conducting your finances than debit cards.
Looking at the credit cards vs debit cards pros and cons, it should be clear that neither is right for every situation. Most people have one of each in their wallet.
While credit cards carry clear advantages in most instances, plenty of folks are rightly wary of the temptation to rack up debt. In that respect, sticking with a debit card can be advantageous, forcing you to spend within your means.