Credit vs. Debit Cards
What's the difference between credit cards and debit cards? Chances are you have at least one of the two in your wallet. Which is better? Both have their benefits and potential drawbacks, depending on your financial situation, spending habits, and credit history. Learn the basics of credit vs. debit cards below.
What You Need to Know About Credit Cards
Institutions, such as banks, issue credit cards to cardholders after they've applied for and been approved for a line of credit. Cardholders agree to repay the money borrowed with interest. There are four types of credit cards:
- Standard Card — provides a line of credit.
- Rewards Card — offers perks like travel points and cash back.
- Secured Card — can't be used without a cash deposit as collateral.
- Charge Card — doesn't come with a spending limit, but typically doesn't allow unpaid balances to carry over.
Credit card usage also impacts your credit report and credit score. Your credit report provides lenders with a window into your financial history, while your credit score summarizes your creditworthiness. Using credit cards responsibly can significantly raise your credit score and improve your chances of getting approved for personal loans, low auto financing rates, and more. On the other hand, failing to repay your credit card bills can send your credit score into a downward spiral. None of this is true for a debit card.
Also, credit cards offer greater protection for cardholders than debit cards. The minimum user liability for purchases made with a stolen credit card is $50 if the theft is reported within a reasonable amount of time. According to the Electronic Funds Transfer Act, debit card users can receive similar protection if the incident is reported within two days. After 60 days, however, there's no liability limit. Additionally, credit card users can dispute transactions they didn't authorize or if items they ordered online arrived damaged, usually resulting in an immediate deduction. Debit card holders can dispute a charge, but an investigation must be conducted before a refund is issued.
What You Need to Know About Debit Cards
Debit cards are payment cards that connect cardholders to their checking accounts (usually), so they don't have to carry cash or checks. No lines of credit are involved. Here are the different types of debit cards:
- Standard Debit Card — allows users to make purchases with the money from their bank accounts.
- Electronic Benefits Transfer (EBT) Card — allows users to make purchases with the cash and/or food benefits issued to them by the state and the federal government.
- Prepaid Debit Card — often given as a gift, these cards come with a pre-loaded spending amount.
With the exception of a potential overdraft charge, debit cards don't require fees and you don't have to pay interest, as you're using your own money. Prepaid debit cards, however, do require activation and usage fees. Perhaps the biggest advantage to debit cards — other than convenience — is debt avoidance. Using debit cards over credit cards can reduce the desire to spend more and make impulse buys. In many cases, a credit card limit is greater than what the user has available in their bank account, which can lead to overspending and unmanageable credit card bills.
- Credit cards are issued by institutions and allow cardholders to use a certain amount of credit under the condition they repay it with interest. Debit cards give users access to the money in their own bank accounts.
- Credit cards offer more protection for users, but often include annual fees, over-limit fees, late fees, and more.
- Debit cards offer fewer protections, but include none of the fees required by some credit companies.