Debit Card vs. Credit Card: An Overview

Debit and credit cards are widely used throughout the world, and although they look similar, there are major differences between them. For example, a debit card takes funds directly from your bank account, while a credit card is linked to a credit line that you can pay back later. In this article, we look at how each type of card works and whether it's better to use one or the other.

How Debit Cards Work

Banks issue debit cards to their customers so they can make purchases or obtain cash without having to write a paper check or visit a teller at the bank. The card is linked to the customer's checking (or sometimes savings) account.

Debit cards can be used for withdrawals at automatic teller machines (ATMs) as well as for purchases at retailers in-store and online. When the card is used in a transaction, the money comes out of the linked account either immediately or after a brief interval. If you don't have enough money in the account to cover the transaction, your card may be rejected.

Debit cards have a unique personal identification number (PIN), which you punch in on the ATM keypad or the merchant's point-of-sale terminal. In online transactions, you may be asked for the card's validation code as a security measure.

Most debit cards are linked to a processing network, such as Visa or Mastercard, allowing them to be used anywhere cards in that network are accepted. There are also offline debit cards, which are not electronically connected to your account.

How Credit Cards Work

Credit cards are also issued by banks but require a separate application process. You don't have to keep an account at that bank to apply.

Rather than being linked to a bank account, credit cards have a credit line that the user can borrow against, usually up to a certain preset limit. Card issuers charge interest on the money the cardholder borrows, although cardholders can often avoid interest if they pay back their full balance within their card's grace period.

Like debit cards, credit cards typically belong to a card processing network like Visa and Mastercard and can be used anywhere cards in that network are accepted. Private label or store credit cards are an exception to that, however: They are good only at a particular retail chain.

Also like debit cards, credit cards can often be used at ATMs to get cash, although cash advances on a credit card can be costly in terms of fees and interest.

Other Key Differences Between Debit and Credit Cards

In addition to the distinctions mentioned above, debit and credit cards have some other differences. Among the most important ones:

Debit cards won't affect your credit score. Your credit score is based on information supplied to credit bureaus by your various creditors, including any credit card issuers. If you consistently pay your credit bills on time, that will help your credit score, while missing or late payments will hurt it. Debit cards, however, don't report to credit bureaus, so they won't affect your score one way or the other.

Debit cards don't charge interest. You won't owe interest on your debit card because you aren't borrowing money. However, if you have overdraft protection on your card and spend more than you have in your account, the bank will lend you the money to cover the difference and you'll face overdraft fees.

Credit cards often pay rewards. Many credit cards today have programs that reward cardholders with cash back or airline miles on their purchases. Some debit cards and checking accounts are starting to, as well, but their rewards tend to be less generous.

Credit cards have better consumer protections. Credit and debit cards are governed by different consumer laws. With a credit card, your liability for fraudulent charges is generally capped at $50 and sometimes at $0. With a debit card, you could (in the worst-case scenario) lose all of the money in your linked accounts.

Which Is Better: a Credit Card or Debit Card?

Both credit and debit cards can be handy to have in your wallet. In fact, it is hard to get along in today's financial world without one or both of them. Some merchants won't even accept cash anymore. Credit cards can be especially useful if you need to make a large purchase or face a financial emergency and don't have enough cash available in your checking account. Debit cards, on the other hand, can be helpful for staying within your budget and not spending money you don't have. Credit cards are an easy way to get into financial trouble if you're someone who might be inclined to.

If you're trying to build a credit history, or repair a damaged one, a credit card used responsibly can be a practical way to accomplish that. In fact, there are credit cards designed largely for that purpose: student credit cards, starter credit cards, and secured credit cards.

The Bottom Line

Debit cards and credit cards both have their uses. And choosing between them is not an either/or decision. If you qualify, there is no reason you can't have both to use as appropriate.