Fundamental Differences Between Credit and Debit 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. But there are a number of fundamental differences between debit and 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 and perks 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When you use a debit card, funds are immediately withdrawn from your bank account, as if it were an instant check.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, unless you opt-in to an overdraft program which often charges a fee but allows your account balance to dip into negative territory.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 and spend within your credit limit. Credit card processing is more complex than payment with a debit card. When you pay by credit card, your card issuer pays the vendor, then you repay your card company. 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.²

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:

• Credit cards can help you build your credit. Responsible credit card use, like on-time payments and keeping a low balance, can build your credit score, which may in turn make it easier for you to do things like increase your credit limit, secure lower interest rates, or get a mortgage.
• They’re safer than debit cards. If your credit card is used fraudulently, it usually affects your card issuer more than you. According to the Fair Credit Billing Act (FCBA), you’ll never have to pay more than $50 in fees if a criminal uses your card³—and many card companies won’t charge card members at all. But if an unauthorized person gets hold of your debit card, whatever purchases they make are taken directly from your bank account. Federal law dictates that you could pay as much as $500 or more, depending on when you report your card as compromised.⁴
• You’ll get rewards for purchases you’re already making. For every dollar you spend, you’ll typically get cash back rewards, airline miles, or points in a cardholder loyalty program that you can trade in for goods or cash.
• Credit cards can have additional perks. Depending on the card, you could benefit from rental car insurance, airport lounge access, concierge services, and even extended warranties on electronics.