Credit Cards vs Debit Cards: The Difference

Credit cards and debit cards typically look almost identical, with 16 digit card numbers, expiration dates, and personal identification codes. But that is where the similarity ends. Debit cards allow bank customers to spend money by drawing on funds they have deposited at the bank. Credit cards allow consumers to borrow money from the card issuer up to a certain limit in order to purchase items or withdraw cash. We take a look at credit cards vs debit cards.

You probably have at least one credit card and one debit card in your wallet. The convenience and protection they offer are hard to beat, but they have important differences that could substantially affect your pocketbook. Here is how to choose which to use when you need to swipe the plastic.

Credit Cards

A credit card is a card issued by a financial institution, typically a bank, and it enables the cardholder to borrow funds from that institution. Cardholders agree to pay the money back, with interest, according to the institution’s terms. Credit cards are issued in four categories:

  • Standard cards simply extend a line of credit to their users.
  • Rewards cards offer cash back, travel points, or other benefits to customers.
  • Secured credit cards require an initial cash deposit that is held by the issuer as collateral.
  • Charge cards have no preset spending limit, but often do not allow unpaid balances to carry over from month to month.

Credit card users can reap cash, discounts, travel points, and many other perks unavailable to debit card holders by using reward cards. Consumers who pay off their cards in full and on time every month can profit substantially by running their monthly purchases and bills through rewards cards.

Credit card use is also reflected on a consumer’s credit report, which allows responsible spenders to raise their scores with a history of expenditures and timely payments. These cards may also provide additional warranties or insurance for items purchases – above those the retailer or brand is offering. If an item bought with a credit card becomes defective after the manufacturers warranty has expired, for example, it is worth checking with the credit card company to see if it will provide coverage.

Credit cards still offer much greater protection than debit cards in most cases. What’s more, as long as the customer reports the loss or theft in a timely manner, their maximum liability for purchases made after the card disappeared is £50. And the electronic funds transfer act gives debit card customers the same protection from loss or theft. But only if the customer reports it within 48 hours of discovery. After 48 hours, the card user’s liability rises to £500; after 60 days there is no limit.

Debit Cards

A debit card is a payment card that makes payment by deducting money directly from a consumer’s checking account, rather than via loan from a bank. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors like Visa or MasterCard.

There are also two types of debit cards that do not require the customer to have a checking or savings account, as well as one standard type:

  • Standard debit cards draw on your bank account
  • Electronic Benefits Transfer cards are issued by state and federal agencies to allow qualifying users to use their benefits to make purchases.
  • Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was pre-loaded on the card.

Conclusion

Frugal consumers may prefer to use debit cards because there usually a few or no associated fees unless users spend more than they have in their account and incur an overdraft fee. By contrast, credit cards generally charge activation and usage fees, over limit fees, late payment fees, and a plethora of other penalties, in addition to monthly interest on the card’s outstanding balance.