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

Debit Card vs. Credit Card: An Overview

Many debit cards and credit cards have similar features. Typically, both cards carry the logo of a major credit card company, such as Visa or Mastercard, and both can be swiped at retailers to purchase goods and services. A debit card, however, uses funds from your bank account. A credit card uses a credit line that can be paid back later, which gives you more time to pay. A customer's credit line depends on their creditworthiness, and they can decide how and when to spend the line of credit and are usually billed on a monthly cycle.

A debit card may come with an overdraft line of credit connected to a customer's checking account to cover overspending. A credit card has a specified amount of credit attached to it, and if a consumer tries to spend beyond the credit limit, the card will be denied.

Key Takeaways

  • Credit cards are debt instruments. Debit cards are not.
  • Unless a checking account comes with an overdraft, debit card users can only spend the money available in their bank account.
  • A standard debit card is linked to a checking account. A prepaid debit card is not.
  • A credit card is linked to a line of credit offered by the company that issued the card.
  • Credit cards help build credit history; debit cards don't.

Debit Card

A debit card might look like a credit card, but it is distinctly different from one. A debit card is issued by a bank to their customers to access funds without having to write a paper check or make a cash withdrawal.

A debit card is linked to one's checking account and can be used anywhere credit cards are permitted. If your debit card has a Visa logo, for example, it can be used anywhere that takes Visa. When you use a debit card, the bank places a hold on the amount you have spent. Depending on the purchase amount and your bank, the money will go immediately out of your account or be held by the bank for 24 hours or longer.

You can use your debit card to withdraw cash from your checking account using a unique personal identification number (PIN). When you use your debit card for a purchase, you may be asked for your PIN, or you may be asked to sign for the purchase, similar to a credit card.

For people trying to budget or not over-extend themselves financially, a debit card linked to a checking account may be a better option than a credit card.

Some debit cards are prepaid, and funds are loaded onto the card by a financial institution. These cards can be used in the same manner as a standard-issued debit bank card. However, prepaid cards are just that prepaid, and they are not linked to a person's checking account.

ATM Card vs. Debit Card

An automated teller machine (ATM) card and a debit card are similar. They both allow you to withdraw funds from your checking or savings account at an ATM. However, while both cards can allow you to withdraw cash, usually only a debit card has a Visa or Mastercard log allowing it to be used to purchase goods and services. An ATM card can only be used to withdraw funds from your account.

Credit Card

A credit card is a debt instrument for financial transactions instead of cash or a check or a debit card. Depending on its owner's creditworthiness, a credit card may have a high spending limit or a lower one. When you use a credit card, the purchase amount is automatically added to your outstanding balance.

With most credit card companies, a customer has 30 days to pay before interest is charged on the outstanding balance, though in some cases, interest starts accruing right away.

Responsible credit card users can often earn points and rewards from card issuers, and using credit in a positive manner helps build and maintain a strong credit score.

Interest rates on credit cards can be notoriously high; they are a chief way credit card companies make money. Savvy consumers can avoid paying it by settling their balance in full each month.

Key Differences

When you use a debit card, the money is automatically taken out of your checking account. When you use a credit card, you pay the bill later. You can't use your debit card if your bank account is empty, but you can use a credit card. Besides, credit cards can help you build up your credit or hurt it.

A debit card is simply a tool to use in place of a check or actual cash. You are borrowing money when you use a credit card. When you use a debit card, you are using your funds.

There isn't necessarily a better card to use. Using credit versus using a debit card, which is essentially cash, depends on how you want to spend and manage your money.

However, if someone steals your debit card and takes funds out of your account, it may be more difficult and take longer to get the funds back than if someone steals your credit card. In that case, you can report the card stolen, and your liability is limited.

Debit Card vs. Credit Card Example

Consider two customers who each purchase a television from a local electronics store for $300. One uses a standard debit card, and the other uses a credit card.

The debit card customer swipes their card. Their bank immediately places a $300 hold on their account, effectively earmarking that money for the television purchase and preventing them from spending it on something else. Over the next one to three days, the store sends the transaction details to the bank, which electronically transfers the funds owed to the store.

The other customer uses a traditional credit card. When they swipe it, the credit card company automatically adds the purchase price to their card account's outstanding balance. The credit-card using customer has until their next billing due date to reimburse the company by paying some or all of the amount shown on their statement.

Special Considerations

However, the distinction between debt and non-debt instruments becomes blurred if a debit card user decides to implement overdraft protection. In this case, whenever a person withdraws more money than is available in their account, the bank pays the outstanding amount. The bank account holder is then obligated to repay the account balance owed and any interest charges that apply to overdraft protection.

Overdraft protection is designed to prevent embarrassing situations, such as bounced checks or declined debit transactions. However, this protection does not come cheaply; the interest rates charged by banks for using overdraft protection are as high, if not higher, than the ones associated with credit cards. Therefore, using a debit card with overdraft protection can result in debt-like consequences.

What's the Main Difference Between a Debit Card and a Credit Card?

The main difference between the two cards is the question, "Do you want to pay now or later?" A debit card is tied to your checking or savings account, and when you use it, funds are removed within 24 hours from your account. A credit card can be used to immediately pay for goods and services, but you pay for them when your monthly billing cycle is due.

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

Each card has its own uses and benefits depending on the individual. For example, you may want to consider a credit card for larger purchases, but only if you know, you can pay your bill on time. If you need cash, it is less expensive overall to use your debit card rather than take out a cash advance on your credit card. When you pay with cash, you don't go into debt, which is a risk when you use a credit card.

Credit cards are useful in an emergency at home and abroad. If you have a line of credit at your disposal, you can make an emergency payment without worrying about the money going out of your bank account. Besides, most car rental companies, hotels, and resorts will only accept a credit card on file versus a debit card when you travel.

If you want to build up your credit history, it makes sense to use your card responsibly. Likewise, if your card comes with a rewards program, you may want to use your credit card to earn these benefits. While some debit cards may offer rewards, most don't, and your debit card doesn't improve your credit history.

Is a Credit Card Safer Than a Debit Card?

In most cases, yes. If someone steals your debit card, they have direct access to the cash in your accounts. If someone steals your credit card, you don't lose actual money from your checking or savings account. Banks will freeze your account when you report a card stolen, but you will have more liability than if your credit card is stolen or used.

Can I Use a Credit Card as a Debit Card?

You can use your credit card at an ATM to take out a cash advance from your line of credit. However, most credit cards come with high fees for taking what is, in essence, a short-term loan from your creditor. If you need cash, it may be more prudent to use your debit card.

The Bottom Line

By definition, all credit cards are debt instruments. Whenever someone uses a credit card for a transaction, the cardholder is essentially just borrowing money from a company because the credit card user is still obligated to repay the credit card company.

On the other hand, debit cards are not debt instruments because whenever someone uses a debit card to make a payment, that person is just tapping into their bank account. Except for any related transaction costs, the debit user does not owe money to any external party; the purchase was made with their available funds.

Debit cards and credit cards are both useful tools when you are paying for goods and services. If you are worried about overspending and on a tight budget, a debit card (without an overdraft) may ensure you only spend what you can afford.

A credit card will help you build your credit history, and it is useful in an emergency. You will be less liable for charges if someone steals your credit card versus your debit card, but you run the risk of getting into debt with a credit card with charges that you can't afford to pay back. Both cards can be useful to consumers, especially those who pay close attention to their purchases and pay their bills on time.

Article Sources

  1. Federal Trade Commission. Consumer Information. "Lost or Stolen Credit, ATM, and Debit Cards." Accessed Feb. 20, 2021.