By Megan Doyle | American Express Credit Intel Freelance Contributor
4 Min Read | January 31, 2020 in Cards
“Credit or debit?” It’s a question we’ve heard so many times, we might take the differences between the two for granted. They look the same, feel the same, and they’re both convenient ways to pay at the point of retail sale (cash is so yesterday). But there are a number of fundamental differences of debit vs. credit cards—and they can be critically important to understand.
At the most basic level, debit cards and credit cards pull funds from different sources. But there’s a lot more to it than that. Specifically, credit cards offer numerous benefits that debit cards don’t. But these benefits come with a potentially serious financial risk: debt.
When you use a debit card, funds are immediately drawn from your bank account, as if it were an instant check. This means you usually can’t spend more money than what’s in your account.1 You can also use your debit card to withdraw cash from an ATM, either for free or at a nominal fee.
Credit cards, on the other hand, are like mini loans that you can use over and over again—as long as you pay them back quickly enough. When you pay by credit card, your card issuer pays the vendor, then you repay your card company.2 If you don’t pay your entire balance each month, you’ll usually pay interest on whatever amount remains (and interest can add up—fast). You can also use your credit card to get cash, but you’ll still have to pay the card company back, often with interest and a fee.3
A lot of credit cards boast lucrative rewards (which often come with a higher annual fee), but even the most basic credit cards come with benefits that debit cards don’t. When you’re exploring credit vs. debit cards, here are some reasons you might want to use a credit card:
Against all that, here are the main benefits of choosing a debit card in the debit vs. credit card debate:
The price you pay for the many benefits of a credit card can be risky. By using a credit card, you’re incurring debt with every purchase. And if you don’t pay your credit card bills on time and in full every month, high interest rates and late fees could send that debt spiraling out of control at a rapid speed.
However, if you have good money management skills, treat credit like it’s cash on hand, avoid overspending, pay bills on time, and are financially prepared for emergencies, the rewards likely outweigh the risks.7,8
Although they might seem like the same thing on the surface, debit and credit cards couldn’t be more different. Debit cards are a fairly innocuous way to make payments using money you already have, whereas credit cards offer some hard-to-resist benefits that come with the financial risk of rising debt. To understand what’s right for you, assess your own needs, spending habits, and financial discipline.
1 “Credit Card vs. Debit Card: Why You Should Choose One Over the Other,” Credit Card Insider
2 “Credit or Debit, which one should you use?,” Personal Finance @ Duke
3 “Credit Card Cash Advance Fee Explained,” The Balance
4 “Credit Card vs. Debit Card: Why You Should Choose One Over the Other,” Credit Card Insider
5 Fair Credit Billing Act, Federal Trade Commission
6 Electronic Funds Transfer Act, Federal Deposit Insurance Corporation
7 “6 Credit card tips for smart users,” Nationwide
8 “6 tips for using your credit card this season,” Consumer Financial Protection Bureau