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Debit Card vs. Credit Card

Using a credit or debit card can be a safer option than carrying cash, as long as you keep your cards in a safe place. If you don’t have a credit or debit card or you’re trying to eliminate one or the other, we’ll help you determine the best option for you.

Overview of Debit Cards vs. Credit Cards

The most important thing you’ll need to do before you decide whether you want a debit card or credit card is to do some research and understand the differences between both.

Debit Cards

Debit cards are linked to your checking account so you can make purchases electronically using a personal identification number (PIN).

Debit cards are used to make purchases you would normally pay cash for and withdraw money at ATMs. If you use an ATM affiliated with your bank, you won’t be charged a fee. If you use an out-of-network ATM, you could pay a fee up to $5. 

Before you apply for a debit card, find out if there’s a minimum checking account balance and what fees may apply. Check the bank’s policy on overdrafts, check holds and what they do if your debit card is lost or stolen.

If you don’t have a bank account, you can purchase a prepaid debit card and use the card as you would use a regular debit card. For example, if you deposit $200 onto a prepaid debit card, you can spend up to $200.

Credit Cards

Credit cards are issued by financial institutions and allow you to pay for services and goods using a predetermined line of credit. The maximum credit limit on each card depends on factors such as your credit score, credit history and income.

Fees vary, but most credit cards charge interest if your total balance isn’t paid in full. Some charge annual and late fees, so it’s important to read the fine print before you sign up. If you pay your bill on time, you’ll avoid late fees and increase your credit score. 

If you’re considering a credit card, find out about the credit card’s annual percentage rate (APR). An APR is a percentage you’re charged annually and is based on your creditworthiness. If your credit is fair to poor, you’ll be charged a higher APR. According to the Federal Reserve, the average APR is 12.54%. 

Most credit cards feature security chips where your personal data is stored and offer an additional measure of protection.

Types of Credit Cards

Here’s a breakdown of the 9 most common types of credit cards:

  • Unsecured: These don’t require a bank deposit and are ideal if you have good credit.
  • Secured: Requires a bank deposit and are a good option if you’re building or rebuilding credit.
  • Balance Transfer: Allows you to transfer your balance from another card in order to save money on interest.
  • Travel Rewards: Specifically for earning points toward hotel and airfare based on spending.
  • Gas Rewards: Similar to travel rewards cards, you can earn cash back toward gas purchases.
  • Cash Back Rewards: Cash back is offered based on the amount spent on your credit card.
  • Student: Good for establishing credit and offered to students, usually with a low limit.
  • 0% Intro APR: Offers incentive of no interest on purchases for a limited time period.
  • Retail: Earn points toward products or services from retail stores.

Comparing the Main Components of Debit vs. Credit Cards

Debits are an amount automatically deducted from your bank account. It’s like writing a virtual check. Credit is the opposite. Your credit card is charged for purchases, but you don’t have to pay immediately. Instead, you charge your card and then receive a bill for the minimum payment due each month.

Difference Between a Debit and Credit

Check out the chart for a closer look at the differences between these cards.

Credit CardsDebit Cards
Do fees apply?Late, cash withdrawal and annual fees if applicableTransaction fees apply if using a card not affiliated with your bank
Is interest charged?YesNo
When are payments due?Billed monthlyMoney is deducted from bank account immediately upon purchase
Is there a spending limit?YesSpending limit equals your available bank account balance. Cash withdrawal limits apply depending on your bank

If you rarely write checks and don’t like the idea of paying bills online, you might not want to sign up for a debit or credit card. If you have to pay a large bill, you won’t have to pay for checks or carry a lot of cash if you have a debit card on hand. Even if you don’t have to use it often, it’s there when you need it.

If you’re making a big purchase such as a car or home, you need to establish good credit, and the best way to do that is to pay for credit purchases on time. Paying bills online also creates a record that clearly demonstrates your positive payment history. If you choose either, start slowly with one or the other. You can always opt for another card in the future.

As you can see, credit and debit cards are very different. Knowing the differences is important when making decisions about how to best manage your money.

How to Choose Which One is Right for You

Before you decide which type of card is right for you, ask yourself a few questions:  

  1. Do you write a lot of checks? If so, a debit card allows you to pay most bills online, faster and easier. Another option to consider is signing up for overdraft protection. For a fee, your bank will pay for debit purchases even if your account is negative.
  2. Do you shop frequently? If so, a debit card eliminates the need for you to carry cash. A credit card serves the same purpose, but you’ll be charged interest, late fees and annual fees in some cases.  
  3. Do you need to establish credit or improve your credit score? If the answer is “yes,” a credit card will help you achieve those goals. Paying your credit card bills on time can boost your credit score.
  4. Do you like earning rewards? If so, most banks and credit card companies offer rewards programs based on how much you spend.

Before you take the plunge and sign up for a debit or credit card, it’s a good idea to take a look at your overall financial situation. Review your checking account statements and study your spending patterns.

If your money management skills need work, a credit card might not be your best option. If you’re late on a payment, you could be penalized $35 or more, which will also show up as a negative mark on your credit report.

Consider using a financial planning software program to help organize your bills and bank statements. A budgeting app can also help you establish a budget and save money for emergencies.

Final Thoughts

If you’ve only been using cash for purchases up to this point, the thought of taking on a debit or credit card may seem scary. Maybe you already use a debit card but are considering applying for a credit card, or vice versa. A combination of cash, debit and credit cards is another option. No matter what you decide, it’s important for you to do your research.