The difference between debit cards and credit cards

Have you ever wondered about the uses of a debit card vs. a credit card? It’s likely you have both types of cards in your wallet at this very moment, and you’re given the option to choose one of them—sometimes in a matter of seconds—every time you make a purchase. Still, you have lingering uncertainty about whether you’re making the best choice… and that same question pops into the back of your mind every time you buy something: “Should I use a credit card or debit card?”

Being uncertain about the difference between a credit card and debit card or the best time to use either is a common dilemma. The better you understand the benefits of each—beyond the fact they offer a way to access money without having to carry cash or a checkbook around—the savvier a spender you’ll become.

Managing revolving credit vs. a bank account balance

Credit cards and debit cards both offer a convenient way to pay for things, but they work quite differently behind the scenes. As a result, they each appeal to different types of consumers, says Lou Haverty, financial analyst and founder of a career-advancement website for accountants and financial professionals. 

A credit card is a form of revolving credit. When you spend with your credit card you are borrowing, and you pay interest if you carry a balance, Haverty says. A debit card, by contrast, is linked to a bank account—usually a checking account—and the money is withdrawn as soon as you make the transaction, typically using a PIN.

One difference between debit and credit cards is that with a credit card, the exact amount you can spend depends on your credit limit and the balance you are currently carrying on the card, Haverty explains. If you have a $1,000 credit limit and a $600 balance from previous purchases, you can continue to charge an additional $400. If you’ve reached your credit limit, you won’t be able to use the card for more purchases until you pay off at least part of the balance. You owe a minimum payment each month.

When considering a debit card vs. a credit card, know that most credit cards carry an interest rate, expressed as an annual percentage rate (APR), which is essentially what you pay to borrow. You’ll have to pay interest on that $600 balance mentioned above if you carry the balance from month to month. “Credit cards require a responsible approach to your personal finances because you have the ability to spend beyond what you might have as cash in your bank account,” Haverty says.

Another difference between debit and credit cards is that with a debit card, funds are pulled directly from the balance you have in the checking account to which the card is linked. In a traditional account setup, you can’t spend more than what you have in the account, which helps reduce the chance of racking up debt. If your account offers overdraft protection, you may be able to spend more than your account balance by leveraging funds from a different, linked bank account.

Knowing the requirements for each card

Another key difference between a debit and credit card is the criteria you’ll need to meet for each. “Getting approved for a credit card is usually dependent on your personal credit score. The higher your credit score, the more likely you are to be approved,” Haverty says. “If you have a lower credit score, you may still get approved, but you might have a lower credit limit.”

Patricia Stallworth, a CFP® and a senior financial planner at a financial planning firm, says that in addition to your credit history, factors such as your employment status could play a role in credit card approval. 

When analyzing a debit card vs. credit card, consider that a debit card is typically issued automatically when you open a checking account. This process usually requires some personal information, such as a Social Security number, driver’s license, employment information, and valid email address. A deposit may also be needed to fund the account and complete the application. Then stay tuned for your debit card in the mail!

When should I use my credit card vs. debit card?

While it’s easy to have debit card vs. credit card on the mind, there are some scenarios in which using either a debit card or a credit card could fit the bill, depending on your financial needs and goals. Use the outline below as a guide for when the question of “When should I use my credit card vs. debit card?” comes up:

Use your debit card if…

• You’re new to using a card to make purchases. Until you know you have the discipline to control your spending with a card, a debit card could be the way to go. You can learn to build good money habits with a debit card since it helps ensure that you only spend what you can afford. “Debit cards are great for everyday purchases that you have budgeted for because the money comes directly out of your account,” Stallworth says.
• You want cash back without the fees. If your debit card is linked to a checking account that offers rewards, Stallworth says you may have rewards-earning potential without the hassle of fees. “While there is generally no cost to participate in debit card rewards programs, the costs and fees may be higher with some credit card programs,” she adds. For instance, the Discover^® Cashback Debit charges no fees and allows you to earn 1% cash back on up to $3,000 in debit card purchases each month.¹

Checking with cash back and no monthly fees

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Discover Bank, Member FDIC

• You have debt you can’t pay off. If you’re wondering, “When should I use my credit card vs. debit card?” then consider your debt. “If you’re struggling to manage or get out of debt, a debit card should be your ‘go-to card,’” Stallworth says. “You can’t get out of debt if you keep charging.”
• You want cash at the register. If you’re a fan of the envelope system and like to have cash in your wallet, consider this difference between debit cards and credit cards: Most retail stores will allow you to get cash at the register when you pay with your debit card. “A credit card will most likely charge you a cash advance fee if that feature is available,” Haverty says.

Use your credit card if…

• You want product coverage. Some credit cards come with purchase protection, which makes them a great option for online and large purchases, Stallworth says. “If I have a dispute with a merchant, I have more leverage with a large credit card company behind me.”
• You’re trying to build (or rebuild) your credit. “You will need a single credit card with a small limit that you pay off in full each month to build a credit history,” Haverty says. Or if you are unable to pay in full each month, be sure to make at least the minimum monthly payment on time each month. A key difference between debit and credit cards is that most debit card usage can’t help you build a credit history. A debit card can help you build strong budgeting skills, so you’re better prepared to transition to a credit card.
• You want to earn travel rewards. If you’re debating between a debit card vs. a credit card and are focused on travel, consider that credit card rewards programs may offer robust rewards in a specific category, like travel, Stallworth says. While it’s always important to read the fine print (so you’re not paying more than you intend in fees or interest rate charges just to get rewards), you could find a credit card that offers opportunities to earn free flights and pay less for checked baggage—just for using the card regularly. (By the way, this is a great way to plan a vacation without going into debt.)

How to use both cards to maximize your finances

Now that you understand which circumstances might be best to use a debit card vs. credit card, you can make the point-of-purchase decision of “When should I use my credit card vs. debit card?” a little easier. It really depends on the goals you have laid out for your personal finances.

Get comfortable using both financial tools for their respective features. But be sure to stick to your budget, and don’t accidentally overspend from your bank account or charge more than you can afford to pay in full by your credit card’s monthly due date. When you learn to confidently use both cards to your advantage, you can enjoy all the various perks and protections—times two!

¹ See Deposit Account Agreement for details on transaction eligibility, limitations, and terms.

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