At first glance, it may seem like a silly question. Debit cards allow you to, you know… debit stuff. Credit cards, on the other hand, offer you, um… credit.
Yeah, it’s not such a silly question after all – especially if you’re trying to decide when to use which option. So we’re going to take a moment to consider the benefits and potential pitfalls of each, along with some specific “compare and contrast” along the way. Debit cards and credit cards both have their uses and advantages. But like any financial tool, it’s all about how they’re used.
Difference Between Debit Cards and Credit Cards
Debit cards and credit cards certainly LOOK the same. They’re the same size, have the same 16-digit numbers across the front, many of the same logos and designs. And they fit into the same little machines the same basic way. In the past year, it’s certainly felt like they both require swiping when you try to insert them chip-first. And either one requires inserting chip-first if you try to swipe!
And to be fair, debit cards were largely designed to look and in many ways operate like credit cards. Or at least to be usable anywhere you could use a credit card. That’s part of what makes them so convenient. Just to muddy the waters further, more debit cards are trying to incorporate some of the advantages of credit cards, and vice versa. No wonder it’s easy to get confused!
Still, it’s probably worth taking a step back and considering some of the important ways in which debit cards and credit cards are fundamentally different. Many may seem obvious to you, but others you may not have thought about recently. Let’s start with the biggie…
Debit vs. Credit: The “Debit” Part
The most important difference between debit cards and credit cards, not surprisingly, is where the money comes from. While we like to pretend that anything we pay for with plastic is somehow “free,” that is of course not the case.
Your debit card is tied to your checking account. It was originally designed to replace or supplement the fading practice of writing checks. It was a win-win for customers and businesses alike. It’s much easier to use the little card with your information already magically encoded in that funny strip on the back than to mess with writing out a paper check. With a debit card, you get a receipt; with a check, you’d get a carbon – or maybe not even that. For businesses, once the card is processed, if it’s approved, it’s approved. The money is instantly debited from your account – hence the name. The deal is done, with no danger the money will somehow go away after you leave. With a check, there’s always the possibility it will bounce and the merchant will be stuck trying to track you down to make good on it.
Because a debit card is essentially a “check” streamlined into credit card form, it’s pretty difficult to spend more than you have in the bank. How much you can spend is dictated by how much you have in the bank. Sure, you may have overdraft protection or some arrangement by which your savings account acts as a backup for your checking, but even in those cases, you’re paying immediate penalties in addition to funds being taken out of your account to pay the merchant or other service. There’s no telling yourself you’ll pay it back later, over time, etc. That’s simply not how they work.
Debit Card Limit
The flip side of this, of course, is that if you don’t have the money to pay for something, you don’t have the money. You can’t have it, whether it’s yet another pair of shoes or penicillin from grandma. You pay zero interest on purchases with your debit card because interest is the cost of borrowing money, and you’re not borrowing – you’re spending.
Debit vs. Credit: The “Credit” Part
Credit cards, on the other hand, offer exactly what the name implies – credit. How much you can spend is dictated by your credit score and credit history, particularly your credit history with that specific card. The longer you have a card without defaulting completely on your payments, the higher they’ll nudge up your spending limit, even if your balance has never ever actually gotten lower no matter how long you’ve been paying.
Every time you use your credit card, you’re taking out a loan. It’s a revolving loan, meaning that as you pay it back, the money becomes available to you again to borrow on the same terms. This is an amazingly flexible source of financing. But you pay for that convenience with relatively high-interest rates compared to other types of loans. The exception, of course, is if you pay your balance in full each month. You pay no interest that way because your payment is so timely, it’s like you’re not actually borrowing.
Credit Card Balance
In other words, people like my wife who pay their credit card balance in full every month are essentially using it like a debit card – one with a 30-day delay between using the money and the funds coming out of their account. Why would they bother if there’s little difference between debit cards and credit cards when used this way? Because going cashless is an easy way to keep track of your spending and take advantage of the protections and rewards of a credit card without paying credit card interest rates.
You don’t normally hear about people working themselves into despair trying to conquer debit card debt. I’m pretty sure that would be impossible. On the other hand, debit cards are limited to what you actually have available right this moment. They’re far less dangerous because they’re far less flexible. You may recall Uncle Ben’s warning to Spiderman – the one about “with great power comes great responsibility”? He could easily have been talking about the difference between debit cards and credit cards.
I mean, probably not – but he has shot right afterward, so you can’t exactly prove me wrong. Plus, he was fictional, so I have that in my favor as well.
Other Benefits to Debit Cards (There Are A Few!)
Debit cards are by design fairly “no frills,” which is in fact their primary benefit. There are a few other advantages worth considering, however.
The biggest is probably the ease of withdrawing cash from your checking account or any connected accounts and pretty much any ATM in the universe. Those outside your bank’s network may charge you a few dollars to do so, but it’s pretty hard to find a town so small that there’s not at least one automated teller tucked away somewhere. In any city large enough to have a few chain stores, it seems like they’re on every corner and in every convenience store.
Sure, easy access to cash can be a temptation, but it’s not so different than using your debit card directly. And you can’t out more than you have in your account, minus whatever overdraft arrangements you pay a hefty fee for with your bank or credit union.
Taking Cash From Credit Cards is a Bad Idea
Most credit cards allow you to take out cash as well, but it’s almost universally a horrible idea. That’s not what they were created to do, and they’re not very good at it. The fees tend to be high, and the interest rates on cash withdrawals are usually brutal – almost like they’re punishing you for not coming up with a better plan. You should be well informed about credit cards before you take one of them.
You’re better off taking out a personal loan of some sort if you really need the cash. Or sell plasma or your old comic book collection. Better yet, suggest your significant other sells THEIR plasma and collectibles. If they really love you, they’ll do it. But there are few if any situations in which taking out a cash advance on a traditional credit card is a good plan.
The only other advantage sometimes cited is that you’re rarely asked to sign a screen these days when using your debit card. More typically, all you have to do is enter your 4-digit PIN and you’re good to go.
Other Benefits to Credit Cards (There are Several!)
There are so many types of credit cards these days. It’s difficult to discuss them collectively without acknowledging that everything I’m about to say as several exceptions out there. In general, however, there are some important distinctions between debit cards and credit cards when it comes to the frills and features.
I mentioned a moment ago that withdrawing cash on your credit card is a horrible idea, and it is. So is spending beyond your actual limit compared to your allowed-by-the-issuing-card-company limit. Just because they’ll let you use up to $12,000 or whatever doesn’t mean you should ignore your perfectly clear budget and start spending with plastic because the card company says so. They’re not necessarily evil or anything, but they probably have different priorities than you do. Let’s just leave it at that for now, shall we?
Planes, Trains, and Amazon
Long-distance transactions, on the other hand, or charges in which the final total can’t be determined upfront, are great times to use a credit card. When you’re booking a flight, reserving a hotel, or renting a vehicle, you’ll definitely want to use a good old-fashioned credit card. Part of this is convenience. You may have noticed when you check in to a hotel, you asked to provide a credit card for “incidentals.” This is the hotel’s way of covering any pay-per-view movies your kids watch after you go to sleep, any stuff you “accidentally” take with you from the room, or potential damages if you go all “rock star” and start breaking things.
Even if you don’t end up incurring extra charges, a “hold” goes on your card for some predetermined amount – $50 or $100 is typical. On a credit card, this is no big deal. You’ll probably never notice it happened. With a debit card, however, that preset amount is “claimed” until they’re sure they don’t need to charge you. At that point, those funds go back into your available balance. But it’s not always immediate and it can be quite inconvenient if you need access to those dollars.
The PIN-less and the Fraud
Credit card fraud is becoming common and you must be very careful. Most credit cards come with pretty decent “fraud protection” as well. Doing business online or over the phone is inherently risky. Although, it’s a minimal risk, it’s still higher than walking into your local merchant and paying cash. And we’ve all heard the horror stories about stolen identities and credit card numbers on the “dark web” and all that. And of course, there are always the classic “lost or stolen” scenarios as well.
As long as you act in good faith and report any problems as quickly as possible to the issuing company, most cards offer you pretty thorough coverage. Your local bank or credit union will no doubt try to do right by you as well if something happens with your debit card or checking account. But it’s a very different problem when the actual cash has already been removed from your account in some form or another than when those same numbers show up on a credit card statement you haven’t paid yet.
Cash Back, Miles, Points, and Other “Rewards”
There’s no end to the varieties of “rewards” programs out there on various credit cards. Which ones appeal to you, or whether any of them do, depends on your spending habits and personal preferences. They are, so far, specific to credit cards, however.
While nothing’s impossible, it would be difficult for debit cards to offer anything comparable because debit cards make very little money from your using them. They’re convenience so you’ll do business with your chosen bank or credit union. Credit cards, on the other hand, make a fortune off of your spending, meaning (a) intense competition between card companies and endless efforts to make THEIR card stand out from all the others.
Before taking out a new credit card, you should avail yourself of one of our online tools to compare various card features. And gather the relevant credit card information for yourself. I could tell you what I like, but in this case, that’s not all that helpful. As with so many things, we’re here to provide information and connections. The actual decisions are entirely up to you. I WOULD suggest you actively seek out the information you’re interested in and proactively make your decision. If you find yourself tempted by some random offer you’ve received online or in the mail, at least make sure you ask the right questions before choosing convenience over careful consideration.
Giving Yourself Some Credit
There’s one last benefit to using a credit card, at least periodically. Because credit cards are a type of loan, making regular payments on your balance(s) helps build or rebuild your credit. You probably don’t want to buy stuff just to build a credit history. But if you’re making a medium-sized purchase anyway and know you can handle the payments, you might consider charging it.
The stronger your credit score, the better the terms available to you down the road. The more positive credit history you build, the easier it is for you to borrow for the important stuff – homes, automobiles, vacations, weddings, etc. – at much better rates in the future. Debit cards are wonderful because they don’t let you go in debt by using them. But because they’re not a form of debt, they don’t impact your credit score one way or the other.
You may choose to have only one credit card and use it sparingly. You might opt to have several and use different cards for different purposes. Also, you don’t necessarily have to choose. Although, very few people have good reason to need more than a couple of credit cards at any one time. In the end, though, it’s your call what combination of debit cards and credit cards you wish to carry.
The most common way to get a debit card is through your local bank or credit union, or wherever you have a checking account. That same local bank or credit union no doubt offers several credit card options as well. Unlike debit cards, however, you can apply for credit cards from dozens of different places. And yes, we’re one of those places.
Don’t worry – I’m not pushing a credit card offer on you. We don’t even issue them. What we do have, however, is a carefully curated database of reputable online institutions which do, and with whom we’ve arranged to connect some of our favorite customers if they so choose. Because of the low overhead and nationwide reach possible with the internet, the rates and terms are surprisingly competitive.
You know we’re here if you need us. Now, go make great financial choices!
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.