Credit cards vs. debit cards: Key differences

Credit and debit cards look similar, and both can be a fast, convenient way to pay. But they have some fundamental differences. The main one is that when you pay with a credit card, you’re borrowing money from a line of credit to repay later. When you pay with a debit card, you’re pulling directly from money you already have in your checking account. 

What you’ll learn:

• Credit cards involve borrowing money from a line of credit, and debit cards draw from your checking account.

• Credit cards can be used to build credit, while debit cards typically can’t.

• Many credit cards offer rewards, while most debit cards don’t.

• Debit cards don’t have the same federally mandated fraud protections as credit cards.

The main difference between credit cards and debit cards is whether you’re borrowing money. But they have some other key differences.

A credit card lets you borrow money from a credit card issuer to make purchases. Lenders determine how much you can borrow, your credit limit, based on multiple factors, including creditworthiness. Things like your payment history, how often you’ve applied for credit and more can affect your creditworthiness.

As you use your credit card, purchases add up. At the end of each billing cycle, about every 30 days, you’ll receive a credit card statement telling you:

• How much you’ve spent

• How much you owe

• When your payment is due

If you pay your balance in full on or before your due date every month, you may be able to avoid paying interest on new purchases. Your minimum payment is the smallest amount you can pay each billing cycle to keep your account current and avoid late fees.

Here are some of the potential upsides of using a credit card and some things to consider.

Some advantages of using a credit card responsibly include:

• Credit building: Using your credit card responsibly can help you build a positive credit history and improve your credit scores.

• Flexibility: Credit cards can give you the flexibility to do things like pay off a large purchase over time or cover unexpected expenses. 

• Rewards: Many credit cards let you earn rewards that you may be able to redeem for things like travel, cash back, statement credits and gift cards.

• Fraud protection: Federal law provides consumers with some protections against unauthorized credit card use. And some issuers provide even more. For example, Capital One offers $0 liability for unauthorized charges. This means if your card is lost or stolen, you won’t be responsible for charges you didn’t authorize.

• Network benefits: Some credit cards come with benefits provided by the credit card networks. For example, some cards have travel benefits like insurance for lost luggage, coverage for trip cancellations or interruptions, and travel assistance services.

• Budgeting: You can use your credit card statement to help you track your expenses and create a budget that fits your lifestyle.

When building credit, consider some of the drawbacks to using a credit card, and find out how you could avoid them:

• Interest charges: Credit cards may charge interest. But paying your balance in full every month can help you avoid interest. And the card’s grace period gives you more time to pay before interest is charged.

• Fees: Depending on the card you choose, you could encounter some common credit card fees, including annual fees, late fees, balance transfer fees and cash advance fees. But by doing things like choosing a card with no annual fee and always paying your bill on time, you can avoid them altogether. And keep in mind that debit cards may charge fees too. 

• Potential to harm credit score: If you don’t use credit cards responsibly, you could hurt your credit score.

A debit card is linked to your checking account and lets you draw directly from that account to make purchases. Debit cards can also be used at ATMs for cash withdrawals and other transactions.

When you pay for something with your debit card, you’re using money you already have. The purchase amount is deducted from your linked bank account. 

If you have enough money in your account when you use your debit card for a purchase, you should be good to go. If you don’t have enough money to cover a purchase, a few things could happen:

• Transactions could be declined.

• If you’ve linked your debit card to your savings account, your bank or credit union may automatically transfer funds to your checking account to make up the difference and let the transaction go through. 

• Transactions could be approved, but your bank or credit union may charge you an overdraft fee.

Here are some of the benefits and drawbacks of using debit cards:

There are perks to all different kinds of payment options, including debit cards.

• Convenient access to your bank account: You can pay using money you already have without having to carry cash or write a check.

• No interest charges: You won’t be charged interest on debit card purchases because you’re not borrowing money. 

• No credit check: There’s typically no credit check or hard inquiry required to get a bank account or debit card. But banks may use ChexSystems, a consumer reporting agency that tracks banking history, to screen applicants.

Here are a couple of things to consider when it comes to using debit cards:

• Fraud protection: Fraud protection for a lost or stolen debit card varies, depending on how quickly you report it. And debit cards don’t have the same federally required fraud protections that credit cards have.

• No credit-building benefits: Debit card activity typically isn’t reported to the credit bureaus, so using a debit card generally won’t help you build or improve your credit.

Deciding between a debit card and a credit card depends on your personal needs and financial goals. And depending on your situation, it might be a good idea to have both. 

Credit cards can be useful tools for improving your credit scores, earning rewards and covering unexpected expenses or large purchases. And they’re a convenient way to pay when you’re shopping in person or online. Debit cards offer another convenient way to pay and let you use money you already have.

The main difference between credit cards and debit cards comes down to whether you’re borrowing from a line of credit or using money from your bank account.

If you’re ready to explore your credit card options, you could start by comparing credit cards from Capital One. You can also see if you’ll be approved with 100% certainty. It’s quick and won’t hurt your credit scores.