Differences between credit cards and debit cards

Summary

• A credit card lets you borrow money to make purchases instantly. A debit card is tied to a bank account.
• Credit cards allow you to earn points and rewards while making purchases, but may be more expensive to use than debit cards.
• Debit cards typically don’t offer rewards, but you don’t have to pay anything back or risk interest charges.

In an increasingly cashless world, it’s more important than ever to understand the difference between credit cards and debit cards. Whether you’re paying at a checkout counter or online, the transaction is a little different depending on the type of card you use. Let’s take a closer look at these differences so you can make a more informed decision on which card to use when you’re making purchases.

What is a credit card?

A credit card is a financial tool that allows you to borrow money to make purchases instantly. You’re approved for a certain credit limit, which is the maximum amount you’re permitted to spend each bill cycle. A bill cycle is typically one month, after which you must repay the amount you borrowed, plus any interest and fees.

A credit card is a form of revolving credit, meaning once you repay what you’ve borrowed, you have access to the full credit limit again. How you manage your spending on a credit card is very important because it has a direct impact on your credit score and financial situation. If you don’t pay the statement balance by each bill cycle due date, you may owe interest or face penalty fees. Penalties may lower your credit score, which is the number lenders use to determine your eligibility and interest rates for financial products like loans and credit cards. On the other hand, responsibly managing a credit card may help build your credit.

What is a debit card?

Unlike a credit card, a debit card is tied directly to a bank account. Instead of borrowing funds to make purchases, you’re paying with the funds available in your account. When you buy with a debit card, you don’t have to repay the funds later, but you also don’t build credit.

Main differences between credit and debit cards

The primary difference between credit and debit cards is that one is a form of debt. The other key differences stem from that foundation.

Funding source

Credit cards: Funds borrowed from a line of credit (or borrowed money)

Debit cards: Funds retrieved directly from your checking account

Monthly Payment

Credit cards: Monthly payment; pay later

Debit cards: No monthly payment; funds deducted immediately

Interest and debt

Credit cards: Debt that accrues interest

Debit cards: No interest or debt (unless you overdraft and must pay a penalty fee)

Building credit history

Credit cards: Build credit history

Debit cards: Don’t build credit history

Fraud protection

Credit cards: Build credit history

Debit cards: Limited fraud protection

Rewards and benefits

Credit cards: Offer rewards and benefits

Debit cards: Typically don’t offer rewards and benefits

Fees

Credit cards: More fees

Debit cards: Fewer fees

When should you use a credit card vs. a debit card?

The decision to use a credit card or a debit card comes down to personal preference and debt tolerance.

You might consider using a credit card if:

• You don’t have the funds immediately available for a large purchase, but you plan to soon.
• You want to earn points or rewards on your purchases.
• You have a promotional low intro APR period on purchases.

You might consider using a debit card if:

• You’re making small, everyday purchases.
• You struggle with overspending.
• You’re paying rent, utilities, or other big but essential expenses you don’t want to add to your credit card balance.

Purchase with confidence

Both credit cards and debit cards are ways to make purchases and cover expenses. However, whereas credit cards accumulate debt that you have to pay off later, debit cards pay expenses immediately because they’re tied to your bank account balance. Credit cards may be a great way to build your credit and help you earn rewards, but they might rack up expensive interest charges if you don’t pay off the statement balance in full each month. Both types of cards are useful, but everyone must decide when it’s right to use each based on their own priorities and financial plan.