- Spending money on a credit card vs. a debit card is the difference between spending on a credit line versus spending from your own checking account.
- Debit cards are great for staying within a budget because you’re using money you already have in your checking account.
- But credit cards offer fraud protection and can earn rewards — but overspending can lead to expensive debt.
- Read more stories from Personal Finance Insider.
Credit and debit cards function in the same way: you swipe a card at the store when you’re making a purchase. But they’re different in how they work and what benefits they offer. You might have already established spending patterns with one or the other, but it can be helpful to revisit debit and credit cards and how they can each work for your finances.
Credit vs. debit: At a glance
Wondering what the difference is between spending on a credit card versus a debit card? Here’s what you need to know.
- credit cards draw on a credit line granted to a borrower by a credit issuer. The credit line works like a loan where any amount charged on the credit card must be repaid. If someone doesn’t have enough funds to cover an expense based on the funds they have available in their checking account, they can use a credit card to buy that item.
- Debit cards draw on money someone has already deposited into a checking or savings account. Someone looking to buy something using debit is limited to whatever funds they have available in their account..
“On the most basic level, using a credit card is spending money that has to be paid off later, while using a debit card is spending your own money,” says credit and bankruptcy attorney Ashley F. Morgan.
What is a credit card?
A credit card is a payment card that uses a line of credit — in place of cash or check — to make purchases. Consumers must first apply and be approved for a credit card to use one. Any amount charged to the card must be repaid by a certain time and may include interest and applicable fees, depending on the card you have.
The credit card issuer will keep a running log of what is charged to the card for each billing cycle and issue a bill at the end of it. Interest isn’t typically charged on the first bill they appear on. So if cardmembers pay off their entire balance by the statement date, they don’t have interest charged on their account.
Paying on time each month also helps build a strong credit history and boosts a borrower’s credit score. Paying the balance in full will also keep credit utilization low, which is another factor that will boost your credit score.
Credit cards offer more fraud and liability protection than a debit card. Since a debit card draws money directly from a bank account, it’s difficult to stop the fraudulent activity until the account cardholder — or bank in some cases — notices. It can take weeks to recover money stolen from a checking account via debit transactions. The liability on a debit card is only $50 if you notify your bank within two days, but rises to $500 if you don’t.
A credit card, on the other hand, has a $0 liability protection for fraudulent purchases, meaning, you don’t owe money on purchases you didn’t make. You may even be notified that your card was stolen before you realize it. There are other reasons why using a credit card may work in your favor.
“If there is an uncertainty about a transaction or it is a big ticket item, I highly recommend using a credit card,” says credit and bankruptcy attorney Ashley F. Morgan. “With a credit card, if you need to dispute the transaction, it only is impacting available credit. If you are disputing a charge with the debit card, the funds in your account could be held or frozen until the dispute is over.”
What is a debit card?
A debit card is a payment card tied to a checking or savings account. Unlike a credit card — which draws on a line of credit that you have to pay back — a debit card uses money you’ve already deposited in your account and nothing needs to be repaid.
Debit cards give you access to your money immediately. With a debit card, you don’t need to carry cash and can use it in most stores. If you do need access to cash, many stores will allow you to withdraw some after entering your PIN at checkout.
When you use it at a store, funds are deducted from your checking account and immediately transferred to the merchant’s account. You can only access funds available in your account.
Most of the time, using your debit card is free, but sometimes you can be charged fees by the merchant or your bank.
A debit card is great to use for those new to managing their finances (such as young adults) and those who want to stay on a budget.
A debit card does have fewer protections when it comes to fraudulent activity. Attorney and expert on scams and identity theft Steven Weisman says, “With a debit card, your protection from liability is tied to how soon you become aware and report the fraudulent use, leaving you potentially liable to having your entire bank account emptied with no recourse if you don’t promptly report the problem. It is for this reason that I recommend that people only use debit cards as ATM cards.”
Here’s a look at some of the pros and cons of using a debit card.