Credit Cards vs. Debit Cards

Credit cards and debit cards are integral to modern life. Anytime you make an online purchase, buy gas, or travel, you’ll almost certainly have to use a credit or debit card for that. What’s the difference between a credit card and a debit card though? And when should you use one over the other. There are nuanced answers to this that we’re going to make clear. ​

Let’s start with some basic definitions and a short discussion about how credit cards and debit cards work.

Credit Cards
Credit Cards allow you to take out short-term loans to finance every-day purchases. These loans are available up to a certain amount – your “credit limit” which is determined by the card issuer when you sign up. They’re fast, convenient, and secure. At the end of the month, you can pay for the cumulative amount of the loan (your credit card balance) or you’ll be charged interest on the outstanding amount. Interest rates on credit cards are typically substantially higher than what you’ll see on other loans because they’re intended to be short term. The card issuer may be a credit card company (ex. Discover or American Express), a bank (ex. Chase or Bank of America), or a private company working with a credit card company (ex. Macy’s or Home Depot).

Credit cards are usually subject to an annual fee, but credit cards also typically offer their card holders some perks or rewards for being a member. Those perks can be anything from travel upgrades to concierge services. It depends on the card, your financial standing as a card holder, and the card network as to what perks you’ll get. These perks are paid for via both the interest that’s generated off of cardholders who carry a balance, as well as the annual fee on the card.

There are only four major credit card networks:

  • Visa – The largest and most globally accepted credit card type in the western world. Visa cards always start with the number 4, and essentially all locations that accept credit or debit cards will accept Visa.
  • Mastercard – As the second largest network of cards, Mastercard is also widely accepted. All Mastercards begin with the number 5.
  • American Express – American Express is the fourth largest credit card brand in the US, but has a disproportionate number of wealthy card holders. Though not as commonly accepted as Visa or Mastercard, American Express members usually enjoy perks that those cards don’t offer. All American Express cards begin with 34 or 37.
  • Discover – The third largest credit card brand in the US, Discover also owns the Diners Club brand. It’s less commonly accepted than Visa or Mastercard, though slightly more so than American Express. All Discover cards begin with the number 6.

Debit Cards
Debit cards, by comparison, are issued exclusively by banks and credit unions (learn the difference between banks and credit unions here). They’re like having an instant checkbook in your wallet. The money you spend on a debit card is instantly transferred out of your bank account and sent to the vendor’s bank account. That means that rather than hitting a spending limit as you do on a credit card, you can run out of money available to you on a debit card by running out of money in the bank account that’s tied to the card. You won’t pay any interest either since debit cards are operating on the cash in your bank account and not on credit. Most debit cards will be on the Visa network, and therefore accepted wherever Visa credit cards are. 

Whereas debit cards are usually offered for free with a checking, savings, or money market account, credit cards often have an annual fee associated with them. This annual fee is in addition to any interest you accumulate in the course of carrying a balance on your credit card. The lack of annual fees is one of the big perks of a debit card. 

Should I get a debit card or a credit card?
Most people have both, but debit cards are broadly seen as a better place for young people to start, since they don’t allow you to go into debt and will force you to adopt responsible spending habits (or run out of money). The first time you have a card in your wallet, it becomes very easy to spend money. An all too common problem for first time credit card holders is spending more money than they can pay back at the end of the month, and having to carry a balance on the card. These balances are charged a high rate of interest, which can add up quickly, and be debilitating for those in a precarious financial situation. 

However, one big drawback is that debit cards don’t allow you to build credit history, which can also be problematic for young people. Having a credit history is important when very large purchases become necessary – like cars and houses. The size of these items usually requires taking on a loan and banks want to see some experience with paying loans back regularly before they’ll entrust you with a large amount of money. A credit card helps establish that understanding of debt, and a credit history. 

There are many good first time credit cards that can help young people and those without credit history understand how to use debt. Those will have low interest rates, low or no annual fee, and very low spending limits. Some cards targeted at young consumers will only have spending limits of a few hundred dollars. 

The bottom line is that you should probably start with a dedit card, learn how to use it, and then get a beginners credit card to start establishing credit history. Make sure you find one that fits your lifestyle, as there are hundreds of options.

When is it better to use a debit card?
One of the biggest perks of using a debit card is that you can access cash at an ATM, just by entering your PIN. When you need cash, you should always use your debit card to get it, as virtually all credit cards charge fees for cash withdrawals. In addition, there are some stores that have opted out of credit cards entirely, so you’ll have to use either a debit card or have cash.

When is it better to use a credit card?
If you’re not getting cash, and the store you’re shopping in accepts credit cards, you should almost always use a credit card. This is because you can accumulate rewards points on your everyday purchases that will add up over the course of time and become meaningful. Another reason that you should use a credit card for all the purchases you can is the liability protection that credit cards offer.

Should I use a debit card or a credit card at an ATM?
A debit card is definitely the best option for getting cash at an ATM. Most credit cards will charge you cash withdrawal fees and interest on the cash you get if you don’t use it right away. Debit cards allow you to get cash at any ATM by simply entering your PIN, though you may also have to pay an ATM fee unless the ATM is associated with your bank.

What’s the difference in liability protection between a credit card and a debit card?
This is one of the most important differences between credit cards and debit cards. If your credit card information is compromised (stolen), your liability for fraudulent purchases is usually $0, if you report it right away. If your debit card is stolen, the consequences can be much more severe. First, the thieves can drain your bank account, not rack up debt. The debt can be much more easily wiped out by the credit card company than for a bank to replace your stolen money. This has caused huge problems for people that have had their debit cards stolen. Additionally, your liability for fraudulent purchases on a stolen debit card could be as high as $500 if you don’t notice it right away. 

If you want to learn more about how to deal with a stolen debit card or credit card, click here.

Are credit or debit cards safer?
Generally speaking, from a security perspective, credit cards are safer. However, if you don’t want the possibility of spending too much and accumulating debt, a debit card will keep that from happening. For security, if you’re concerned about having your card stolen or hacked, a credit card is definitely the safer option. 

Credit card or debit card: which is best?
The crux of this decision is that it depends on your situation. For most people, everyday purchases should be put on a credit card, and the debit card should be reserved for only those merchants who don’t accept credit cards. If you need to get cash from an ATM, a debit card is probably the right choice. 

There are an overwhelming number of options for credit and debit cards. Make sure you do some research and choose the ones that fit your needs best.

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