Debit Card vs Credit Card: What's the Difference?
There are two primary card types that you can use when making purchases: debit cards and credit cards. While they may look similar, the two have some noticeable differences. Let’s explore the differences between debit and credit cards and help you decide which is right for you.
A debit card is connected to your bank account and allows you to make purchases using funds you already have. When you use a debit card, the money is deducted from your bank account. This means you’re only spending what you have available in your account. If you don’t have the money in your account to cover a purchase, your purchase may be declined, or you may incur an overdraft fee if you try to spend more than you have.
Pros of Debit Cards:
- Convenient: Debit cards are widely accepted and can be used for in-person and online purchases.
- No Interest: Since you are using your own money, you don’t have to pay interest on purchases.
- Budget-Friendly: Since you can only spend what you have in your account, debit cards help you stay within your budget.
Cons of Debit Cards:
- Limited Protection: Debit cards don’t offer as much fraud protection as credit cards. If your debit card is used fraudulently, you have 48 hours to report it to limit your liability. So, it’s important to monitor your account if you use your debit card and immediately report it if you misplace or lose it.
- No Credit Benefits: You won’t be able to build credit or improve your credit score when using a debit card.
- Rewards: Debit cards don’t typically offer rewards programs or cash-back incentives. However some banks do offer rewards, but it’s just less commonly offered than it is with a credit card.
Alternatively, a credit card allows you to borrow money to make purchases. When you use a credit card, it’s like taking out a loan from the issuer. You then have to repay the “loan,” usually with interest.
Pros of Credit Cards:
- Protection: Some credit cards offer protection against fraud or even have travel-related protection benefits. Additionally, some offer purchase protection covering theft and damage to larger purchases.
- Credit Benefits: Using a credit card responsibly can help you to build credit and improve your credit score through usage and payment activity.
- Rewards: Many credit cards offer rewards programs, such as cash-back, airline miles, or points that can be redeemed for merchandise or gift cards.
Cons of Credit Cards:
- Interest: If you don’t pay your entire statement balance every month, you’ll be charged interest on the balance.
- Temptation to Overspend: Since you’re not using your money, it can be tempting to overspend and rack up debt.
- Fees: Credit cards may come with annual, late payment, or balance transfer fees.
Which One Should You Use?
The answer to this depends on your personal financial situation and spending habits. A debit card may be the choice for you if you need help staying within your budget or are prone to overspending. And a credit card may be a good option if you want to build credit or take advantage of rewards programs. Credit cards are a better choice for online purchases because you have more time to report unauthorized transactions should your card be compromised, and it is easier to deal with than a compromised bank account. Whether you choose a debit card, credit card, or both, remember to use it responsibly and in a way that fits your budget and financial goals.
TLDR: There are two primary card types that you can use when making purchases: debit cards and credit cards. A debit card is connected to your bank account and allows you to make purchases using funds you already have. It may be the choice for you if you need help staying within your budget or are prone to overspending. A credit card allows you to borrow money from the credit card issuer to make purchases and may be a good option if you want to build credit or take advantage of rewards programs.