Credit Card or Debit Card?
Explore the differences between credit cards and debit cards
The biggest difference between credit cards and debit cards is where the money comes from when you make a purchase. A credit card extends you a loan, while a debit card pulls funds directly from your linked banking account.
Both can be used in stores or online, but not all plastic is created equal. Knowing more about the differences between credit cards and debit cards can be important when you’re thinking about spending.
What Is a Credit Card?
In simple terms, a credit card allows you to borrow money in order to make purchases. Every time you swipe, insert, tap or use your card online, you’re basically taking out a loan. And if you pay your balance in full and on time each month, you’ll typically avoid having to pay interest.
How much you can borrow is typically referred to as your credit limit, which is based on a number of factors. Lenders look at your overall creditworthiness, which involves things like your payment history, how often you’ve applied for credit and more.
And remember, there are more costs involved with having a credit card than just the things you purchase. There are also things like APR and other fees to consider.
But with responsible use, there’s also the opportunity to build a positive credit history.
How Do Credit Cards Work?
As you use your credit card, your purchases add up. At the end of each billing cycle—usually every 30 days—you’ll receive a credit card statement telling you how much you’ve spent and how much you owe. Basically, you’ll be paying back all those “loans.”
If you’re not able to pay your balance in full, check how much the minimum payment is. It’s the smallest amount you can pay to keep your account current. Be sure to pay it on time to avoid penalties and late fees. Remember, if you pay your balance in full on or before your due date every month, you may be able to avoid paying interest.
When it comes to your credit limit, it’s also important to note how much of your credit you’re using. Experts recommend using no more than 30% of your total credit.
What Are Some Benefits of Credit Cards?
Credit cards can’t solve financial issues. But as you use your card responsibly and pay your bill on time, you may start improving your credit score. This can put you in a better position for things like credit limit increases, a new card or a loan for something like a house or car.
On top of that, there are plenty of potential perks and benefits to using a credit card:
- Credit cards can provide flexibility, helping you buy things now and spread repayment out over time. That’s especially helpful for potential big-ticket purchases. Just keep in mind you could be charged interest if you don’t pay off your balance in full every month.
- Some cards let you earn rewards as you make purchases. And depending on the type of rewards, you may be able to redeem them on things like travel, cash back, statement credits or gift cards.
- Generally, if you lose your credit card, or it’s stolen, by federal law you’re liable only up to $50 for unauthorized use. But the sooner you report it to your credit card company, the better. If you let the credit card company know before any unauthorized charges are made, you won’t be liable at all. Cards from Capital One® even offer $0 fraud liability.
- Some credit cards, like Venture®, offer great travel benefits. Insurance for lost luggage, coverage for trip cancellations or interruptions, and travel assistance services can all come in handy!
- Your credit card statement is a great way to track your expenses and help you budget.
What Is a Debit Card?
A debit card is usually linked to your checking account. So when you use it to purchase something, you’re using your own money to pay for it. Funds are deducted directly from your account, and you don’t need to worry about stopping by an ATM to get cash.
How Do Debit Cards Work?
Using a debit card to make purchases is similar to using a credit card. But when you use your debit card, you may also be asked to provide a personal identification number (PIN). It’s one measure used to keep your account secure. You can also use your debit card at ATMs to get cash, make deposits, transfer money or check your balance.
If you have enough funds in your account when you use your debit card, you should be good to go. If you don’t have enough money to cover a purchase, a couple of things could happen, depending on whether you’ve signed up for your bank or credit union’s overdraft program:
- If you haven’t enrolled, transactions will generally be declined.
- If you have enrolled, transactions will usually go through, but you’ll likely be charged an overdraft fee if you’re left with a negative balance.
Most banks charge a fixed amount for overdraft fees, regardless of how much the transaction is. That means you could be charged even if you overdraw by just a penny. And you can be charged for multiple overdrafts in a single day.
One way to avoid overdraft fees is to link your debit account to a savings account. If you overdraw, your bank will take money from savings to make up the difference. You may be charged a transfer fee, but it’s usually lower than an overdraft fee.
What Are Some Benefits of Debit Cards?
While debit cards are different from credit cards, they do have their own perks. Here are a few benefits that come with using a debit card:
- You can pay using money you already have without carrying cash or having to write a check.
- Since you’re not borrowing anything, there are no interest charges.
- Debit cards generally can’t hurt your credit. But they can’t help you build credit, either.
- Liability for a lost or stolen debit card varies, depending on how quickly you report it. But some banks offer $0 fraud liability.
- Some banks offer mobile apps that allow you to easily lock and unlock your card. That way, if your card is ever lost or stolen, you can prevent it from being used by someone else.
- When making a purchase in a store, many times you can get cash back as part of the transaction, saving you a trip to the ATM.
When Should You Use a Credit Card or a Debit Card?
Deciding between a credit or debit card depends on your personal needs and financial goals. And depending on your situation, it might be a good idea to have both to choose between.
Credit cards can be a powerful tool when used responsibly. When your credit score is in a solid place, you could be in a better position to get lower interest rates on loans. And that can give you a leg up on goals like buying a car, owning a home or even getting a better credit card.
Debit cards have their place, as well. You know your financial habits best. If you’re looking to limit your spending, a debit card can help you stay within a set budget and spend only what you already have. And while you should definitely stay on top of your account activity, debit cards don’t require you to pay a bill every month.
Can You Use a Debit Card Like a Credit Card?
Physically, yes. You can swipe, insert or use the number on either. But you may be asked at checkout to choose between “debit” or “credit.” Debit transactions may require you to enter your PIN. Choosing credit may require you to sign your name. There also may be differences in how soon transactions post to your account. Debit transactions may be reflected more quickly, depending on how your lender processes payments.
For all their similarities—especially the flexibility they provide together—the differences between credit cards and debit cards are worth keeping in mind when using them to make purchases.
We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.