While there are advantages to using cash, you'll often find a debit or credit card handy, especially when you need to shop online or book a vehicle rental. Both types of cards have widespread acceptance and offer conveniences for making cashless purchases, but they differ in how they're funded since one uses money from your bank account and the other uses borrowed money from a credit line. These payment options also differ in terms of fees, impact on your credit score, security and potential to get you from overspending or going into debt. Read on to learn all about how debit and credit cards work as well as the considerations to know when you're deciding which card fits your needs.
Looking at Debit Cards
When you open a bank account, your financial institution will often give you a debit card to use alongside paper checks. This card typically is backed by Visa or Mastercard and works for purchases online and in-person at most businesses. Your available money to spend with the card is whatever is in your bank account. While you usually can't spend more than that, some banks will offer overdraft protection that may allow a transaction to still go through, potentially with a fee charged for the convenience.
When you make a purchase, you may get to choose between a "debit" transaction with your personal identification number or a "credit" transaction where a signature may instead be required. When you use debit, the money usually comes immediately out of your bank account, and you may get to request cashback for in-person transactions. It usually takes a few days to fully process if you select the "credit" option, and you can't ask for cashback either. Keep in mind that the "credit" option still doesn't mean you're making a purchase from a line of credit, and you won't build credit when you use a debit card.
Your debit card also acts as an ATM card so that you can withdraw money from your checking account as well as deposit checks and cash if you use an ATM that supports these functions. Depending on the ATM and your bank terms, you can end up with transaction fees both from your bank and the ATM network provider. Often, you'll also have a limit to what you can withdraw or spend each day with a debit card.
Read More: Smart Tips for Using Your Debit Card
Learning About Credit Cards
Rather than being funded from a bank account, a credit card provides a specific amount of funding through a line of credit that you're offered through the card issuer. Your online and in-person purchases get added to your credit card balance, and you'll have a minimum monthly payment to make. Once you use up your credit limit, you can't make more purchases until you pay down the balance. Credit cards usually also have a cash advance option where you can use the card and a PIN to withdraw money from an ATM, and this usually comes at an extra cost.
Some credit card issuers offer promotions for new cardholders where you'll pay no interest for a period of time. However, you can expect to incur regular interest charges on your credit card balance as well as face fees if you're late on payments or skip them. Being late on payments can also raise your interest rate. Credit card companies will normally provide a grace period during which you can avoid interest charges as well as autopay options so that you're less likely to forget payments.
When you run up a high credit card bill or have delinquent payments, it has a negative impact on your credit, so you'll need to be sure to use your card wisely. Only charging what's necessary, making timely payments and paying off your balance whenever possible can help you build credit. The fact that payments get reported to the credit bureaus is one of the main differences between a credit card and debit card.
Benefits of a Debit Card
When comparing a debit card to a credit card, you get some shared and unique advantages when you go with debit cards:
- Convenient to use: With a debit card, you can buy things and access your bank funds easily without dealing with paper money. Many retailers will take these cards too.
- Fewer fees: Besides ATM fees, you don't need to worry about interest charges or late fees like with credit cards.
- Easier to stay out of debt: Since you only spend your money, you can avoid piling up debt you can't repay and hurting your credit, as long as you don't overdraft your bank account.
- Simpler to get: Besides completing your bank account application and requesting the card, you don't need to do much to get a debit card, nor do you need to show a certain income or credit score.
- Some rewards available: Like credit cards, some debit cards have rewards for purchases and special perks like extended warranties and travel benefits.
Downsides of a Debit Card
Here are some downsides you need to consider when going with a debit card over a credit card:
- Lack of flexibility: Not having a credit line can be frustrating when you need to make an emergency purchase. Further, some places like hotels and car rental companies may not accept debit cards for upfront payments or deposits. You might also not have much luck when traveling internationally.
- ATM fees: If you need to withdraw money at an ATM, you can face one or two transaction fees each time that can add up.
- Fraud protection limits: If your card gets stolen, the money the criminal spends comes out of your bank account. You usually get some liability protection, but such issues can put you in a more difficult place than with a credit card. Further, if you wait too long to report fraud, you could lose any liability protection offered.
- Doesn't help build credit: Even as you use your debit card wisely, those payments don't get reported to the bureaus to impact your credit report and score in any way. If you end up overdrafting your bank account, that could actually hurt your score.
Benefits of a Credit Card
While credit cards share the convenience benefits that debit cards also offer, they have some unique advantages as well:
- More convenience: With a credit card, you can expect the widest acceptance domestically and internationally, whether you need to rent a car or make a major purchase. Along with regular card purchases, cash advances are available if you need immediate cash.
- More perks available: Credit cards can have better perks than debit cards. For example, your card issuer may have rotating categories of purchases that offer a percentage back. You might even get free travel, allowances for dining and services and other annual statement credits.
- Ability to borrow money: You get the most flexibility when you have a line of credit you can spend, especially if some emergency occurs before your next paycheck arrives.
- Can build credit: A major advantage of a credit card is that you can build your credit when you pay your bills on time and spend wisely. Good credit helps whether you're seeking a job, renting an apartment or applying for a loan in the future.
- More fraud protection: You get more fraud protection with a credit card and may have no liability or at most $50. Further, using a credit card means fraud doesn't result in cash getting taken from your bank account, so it impacts you less.
Read More: How to Get a Credit Card to Build My Credit at 19
Downsides of a Credit Card
While credit cards offer all these advantages over debit cards, keep these potential drawbacks in mind:
- Harder application process: Compared to simply requesting a debit card from your bank, getting a credit card requires a thorough application where each card issuer has its own credit and income standards.
- Easier to go into debt: Since you're using loaned money, you can fall into the trap of making more frivolous purchases with the thought that you can just pay it off later. These can add up so that you find yourself in credit card debt over time.
- More fees: Unless you pay off the balance during the grace period or have some special promotion, you'll need to pay interest on all your credit card purchases, so those charges now cost more. Plus, there are other costs such as an annual fee alongside cash advance and late payment fees.
- Identity theft risk: Like debit cards, credit cards can be stolen so that there are unauthorized charges and other identity theft issues to deal with.
- Can hurt your credit: Late payments, high balances and new credit applications can all hurt your credit score rather than build it.
Deciding on a Card Type
Whether to choose a debit card or credit card will depend on your preferences for how you spend money as well as your comfort with risking debt. Your credit history and tolerance for various fees will also come into play.
For example, if you've struggled with debt before, you might just use a debit card since you can only spend what you already have, and you can avoid the potential to get declined for a credit card or have to pay a higher interest rate. You might also opt for a debit card to limit your fees and avoid interest on purchases. On the other hand, you might choose a credit card for the more widespread acceptance, better protection and rewards and the option to borrow money in a crisis. However, keep in mind a credit card can be harder to obtain if you've got a limited credit history.
In many cases, people will have one of each card so they can enjoy the benefits both options provide. For example, you might use a credit card to get special rewards or handle emergency purchases, while you might use your debit card to pay bills or easily withdraw cash at the checkout lane or ATM. Having both cards can help you avoid issues where a place like a hotel or rental car provider requires a credit card upfront.
Getting a Debit Card
If you've decided to get a debit card and already have a bank account, you can reach out to your bank by phone, online or in-person to find out if you're eligible for a card. You can usually get one with checking accounts, and some savings accounts may also come with one. You can also request a debit card when you sign up for a new bank account, or you can consider prepaid debit cards that you can reload with cash online or at local retailers if you'd rather not open a traditional bank account.
With any debit card, you can expect to go through an activation process. While a bank worker may activate the card for you, often it will come in the mail for you to activate at home. You'll usually find a phone number to call, but online activation is also common. When activating, you'll need the card number and personal information like your Social Security number and birth date. You should also receive a PIN to use or get asked to make one.
Getting a Credit Card
While you won't need to make a bank account to obtain a credit card, you will need to have sufficient income and meet the issuer's credit requirements. To get started, you may receive a preapproval letter with a code to enter to apply online or by phone, or you can research credit card options through your own bank or another major provider like American Express, Capital One or Chase. If you're researching yourself, these providers usually have a preapproval tool that can show you which cards you may qualify for with your credit profile.
Once you get to the card application, you can expect to enter basic personal information alongside details about your employment, rent or mortgage payment amount and cash in bank accounts. You'll get to see some card terms to preview and accept before submitting your application, which may show an immediate approval or require you to wait for a letter to come. Once you receive the card, you'll activate online or by phone like with a debit card, and you may get to make a PIN for cash advances.
Read More: Quickest Way to Get a Credit Card
- Consumer Action: What Do I Need to Know About Using a Debit Card?
- Investopedia: How Do Credit Cards Work?
- Deposit Accounts: Banking 101: How to Get a Debit Card
- Discover: How to Get a Credit Card
- Credit.com: Using Debit Card as Credit
- US Bank: How Credit Cards Work
- Huntington: What's The Difference Between Credit & Debit Cards
- The Mint: Disadvantages of Credit Cards
- Capital One: How Credit Card Interest Works
- Union Bank: The Debit Card Benefits You Never Knew Existed
- Kayak: Which Rental Car Companies Accept Debit Cards?
- CNBC: Amex Adds New Benefits to Most of Its Premium Cards in Streaming, Wireless, Grocery and Dining Categories
- NerdWallet: Credit Card vs. Debit Card: Which Is Safer Online?
- Arvest: Debit Cards
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Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.