Difference Between a Debit Card and a Credit Card
While both plastic cards show a card network logo, debit and credit cards function very differently. A debit card is linked to a bank account, allowing you to spend money directly from your checking or savings account when making purchases, or to withdraw cash at ATM terminals. A credit card, on the other hand, is a financial tool that allows you to borrow funds from a lender and pay for items over time while charging interest.
Both types of cards have their pros and cons, but understanding how they work can help you choose the right card for your needs. When it comes to debit and credit cards, the key difference is that a debit card pulls from your existing funds, while a credit card draws on a line of credit for which you are later billed. This makes it harder to overspend with a debit card, as the funds must be available in your checking account to cover the purchase, and you can only use up to the limit that’s in place.
With a credit card, on the other hand, you are borrowing funds from the credit card issuer and must repay them by the due date (or pay late fees). Credit cards also typically have higher limits than debit cards, and they allow you to carry a balance over time, if you prefer. If you pay off your credit card balance in full each month, however, you’ll build credit and avoid paying interest charges.
What’s the Difference Between a Debit Card and a Credit Card?
The other major difference is that debit and prepaid cards don’t offer the same fraud protections as credit cards. In the case of a credit card, you can report fraudulent transactions and usually get your money back, but if someone else uses your debit card, your own money is tied up until the transaction is reversed, unless your bank has special policies in place. Many financial institutions have adopted zero liability protections on debit cards, but this isn’t the case everywhere.
Debit and prepaid cards can also charge fees for things like out-of-network ATM withdrawals, overdrafts, using PINs during transactions and more. These costs aren’t necessarily bad, but it’s important to know what you’re getting into before you start spending with these cards.
A credit card can help you build a credit history, as the card issuer reports your monthly payment habits to the credit bureaus to determine your credit score. Regularly making payments on time with a credit card will increase your credit score, while missing or paying late will lower it. Debit cards, on the other hand, do not impact your credit score. Some credit card holders even earn rewards on their credit card purchases, including cash back and travel miles. However, most debit cards don’t offer these perks.