What’s the Difference between a Credit Card and a Debit Card?
Have you ever been confused about the difference between a credit and a debit card? On the surface, it is easy to see why. Debit and credit cards are accepted at the same places and they both eliminate the need to carry cash. The cards look similar.
The real difference between a debit and a credit card is how the card company pull the money. A debit card takes it from YOUR bank account and a credit card charges it to a line of credit that you have with a financial institution.
When you make a purchase with a debit card, it draws the money from your checking account by placing a hold on the amount of the purchase. The merchant sends your transaction to their bank and the bank pulls the amount of the purchase from your account to their account and the hold drops off your account. The transaction shows up on your bank account.
Purchases made using a credit card are reflected on your credit card bill. The bank pays the merchant, and you pay your credit card bill later when you receive the bill from the bank. If you do not pay your credit card bill in full every month, you pay interest on the balance at high-interest rates. Your credit card balance and your payments are part of your credit history and affect your credit score. The individual purchases show up on your credit card bill and the credit card payment shows up as a transaction on your bank statement.
Some important differences between a debit card and a credit card:
With a debit card:
- You must know you have the money in your bank account before you make the purchase, or it will result in an overdraft.
- Your spending capacity is based on the balance in your bank account.
- You do not pay interest on purchases.
- It does not affect your credit score or credit history.
- The Fair Credit Billing Act allows a debit card issuer to only reverse disputed charges when the merchant is willing to do so.
- You authorize purchases using a PIN and you can be liable if someone obtains both your debit card and the pin.
- While the merchant likely pays for a debit card transaction as the consumer you don’t get cash back or points.
- A debit card will either be rejected, or the transaction could cause you to have insufficient fund fees if you don’t have the amount you are trying to charge in your account.
With a credit card:
- You can improve your credit score or hurt your credit score depending on your on-time payment history.
- Your spending capacity is determined by the credit limit approved by your bank based on your credit history.
- Your credit card can be rejected, or the transaction could cause fees if you don’t have as much credit available on your limit as you are trying to charge.
- You create a risk of living beyond your means because your credit limit is not determined by your ability to pay your credit card balance.
- Provides cover in an emergency, giving you a month to come up with the cash before the bill is due. This is not a good long-term solution.
- Some credit cards offer cash back or reward points that can reap benefits if you run monthly purchases through reward cards
- You authorize purchases with your signature and are not responsible if someone forges your signature.
- The Fair Credit Billing Act allows credit card users to dispute unauthorized purchases or damaged goods and the user’s card is adjusted immediately.
To make your best financial decision, it is important to know the difference between a credit card and a debit card and apply those differences to your unique circumstances. In every case, use your cards wisely.