A Simple Guide to Debit vs. Credit Cards

When you are putting some charges on the plastic, you may not even think about which card is better to use. Chances are you have at least one debit card and at least one credit card. As it turns out, not all cards are created equal. They may all be a lot more manageable than cash or checks, but they have important differences that can impact your overall balance at the end of the month. Check out the information below to help you decide when you want to swipe and with what.

Major Differences

Credit and debit cards look very similar — they generally both have card numbers, expiration dates, your name, a payment network and some bank’s logo. That is essentially where the similarities end. Debit cards are like digitized checkbooks in that they connect to your savings or checking account that is automatically withdrawn from when a card purchase is made. They usually come free when you open a bank account. Credit cards, in contrast, are more like a line of credit that a bank or financial institution issues. When a credit card purchase is made, the card issuer pays the transaction cost and you become indebted to them. The loan is interest-free so long as your monthly bill is paid in full and on time.

Benefits of Debit

Debit cards often require a PIN code to access. Some financial experts think debit cards are a “safer” option than credit cards, since you can’t rack up interest and the money is taken out of your account right away. They can help you control your spending since you can only use money you already have. Furthermore, debit cards are also useful to help you gain access to cash at ATMs, which credit cards treat as a cash advance that comes with fees and/or a higher interest rate. In fact, frugal customers sometimes prefer debit because they rarely have fees of any kind associated with them unless a user spends more than they have in their account. There are also very few barriers getting in your way of receiving a debit card and no monthly bills to worry about. Debit cards do not affect your credit history.

Benefits of Credit

Credit card use, on the other hand, is reflected on a user’s credit report, allowing responsible consumers to build or raise their scores. Low fraud liability is another draw to credit cards as even though some find credit cards (especially in the US) have low security, you are not usually held responsible for poor security if your card is stolen and/or is used fraudulently. Credit cards are also not required to be connected to a checking account so you are not limited by your available funds (though you will pay interest charges if you aren’t able to pay your bill in full each month). There is one exception to this — secured credit cards often require a deposit to “secure” the line of credit. Credit cards can even give you the chance to earn rewards for your spending when used smartly. These can come in the form of cash, discounts, travel and other types of points and can help save you lots of money in the long run.

While debit cards don’t build credit, credit cards will. You can get a credit card even if you have no credit history, but the better your credit score, the more likely you are to qualify for credit cards with rewards and other perks. You can check your credit scores for free on Credit.com to see where you stand before applying for a credit card. Most issuers will list the level of credit required to be approved (i.e. “excellent” or “fair credit“), but not an exact credit score.