When it comes to making purchases, consumers pay with plastic roughly 60% of the time, according to the Federal Reserve. But while debit and credit cards offer a convenient way to pay, each payment method has unique features you need to know about. Debit and credit cards both offer ease of use and protection against unauthorized transactions. However, credit cards incur debt while debit cards draw from your checking account.
Before making your next purchase, compare the pros and cons of using a debit vs credit card to determine which is best for your situation.
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A credit card is a form of payment that lets consumers and businesses purchase goods and services and repay the balance later. Credit cards typically have a spending limit or credit line. As a cardholder pays a balance down, the available credit for spending increases. There are many different types of credit cards, including cards that offer rewards, 0% introductory APRs and other benefits like travel insurance and purchase protections.
Credit cards are generally associated with one of four major payment networks: Visa, Mastercard, American Express or Discover. A card can be used at any retailer that accepts its payment network. Visa and Mastercard are the most widely accepted, but American Express and Discover are accepted at 99% of places that accept credit cards in the U.S. However, when traveling internationally, American Express and Discover are not as widely accepted for payment.
Your payment history and credit utilization ratio make up roughly two-thirds of your credit score. By making all your credit card payments on time and keeping your balances low, you can build a solid credit score. Ideally, you should pay the card’s entire balance each month to avoid interest. However, when that’s not possible, paying down the balance as much as possible reduces your interest charges and utilization ratio.
Many cards offer rewards on your purchases in the form of cash back, points or miles. Rewards can help you finance travel, or help you pay off debt or save for the future.
Some cards offer the same rewards on every purchase. Others offer bonuses on certain categories of spending, such as travel, dining, groceries or gas. To maximize your rewards, select a card whose bonus categories match the areas where you spend the most.
Under federal law, cardholders are limited to $50 in losses for unauthorized transactions if their card is lost or stolen when the card issuer is notified promptly. However, most credit card issuers take these protections further by offering $0 liability for unauthorized transactions.
These protections give credit cards a major advantage over debit cards. Transactions are removed from your balance owed as long as you report them right away.
Credit cards may also include other protections, like purchase protection, return protection and extended warranties.
Travel credit cards include a range of benefits to save money and improve your travel experience, depending on the type of card.
When you apply for a new credit card, you may be eligible for a sign-up bonus. A sign-up bonus usually offers a large sum of cash back or points for meeting a spending requirement.
For instance, you may get 50,000 points when you spend $3,000 within three months. Offers vary widely by card, and premium credit cards tend to offer the highest bonuses with the largest spending requirements.
Some credit cards offer promotional interest rates on balance transfers, purchases or both. You can get interest-free or low-interest financing for a limited time, so more of your monthly payment goes toward reducing your balance. Promotional interest rates typically last between six and 21 months, and when the promotion expires, the standard APR applies to the balance remaining from that point forward.
With credit cards, it’s far too easy to overspend and max out your credit limit. Many consumers fall into the trap of overspending to earn rewards or because the minimum monthly payment is a fraction of their total balance. As your credit card balance creeps higher, your credit score can be negatively affected. To make matters worse, the growing balance leads to higher interest charges that can harm your finances.
The best credit cards usually require excellent credit to qualify. While this can inspire some consumers to boost their scores, others are left with subpar credit cards that may even charge expensive fees.
In most cases, the card issuer will perform a hard inquiry on your credit report when you apply. The impact is generally less than five points, but those lost points could make or break other loan applications. On the bright side, the impact is short-lived, and your credit score may return to normal within a few months. While the credit inquiry stays on your credit report for up to two years, it only affects your credit score for up to 12 months.
When you carry a balance from one statement to the next, the card issuer will charge interest based on your average daily balance. With the average credit card interest rate of 21.47%, the interest charges can overwhelm your budget in a hurry.
Credit cards charge an assortment of fees if you miss a payment on your credit card. You may be hit with late fees, over-the-limit fees, a penalty APR and other potentially hazardous penalties.
In addition, some credit cards charge annual fees. However, depending on the card’s benefits and rewards, it may be worthwhile to pay an annual fee.
A debit card is a combination of an ATM card and a payment card. It allows customers to access their accounts through an ATM for withdrawals, deposits, transfers and balance inquiries. Debit cards can also be used to pay for purchases by signing a receipt like a credit card or by using a PIN. With each purchase, the money is immediately withdrawn from the linked account. The debit card’s purchasing power can’t exceed the balance of the linked bank account.
Debit cards are popular among people who want to avoid debt. Your spending power is limited to the amount of money in your bank account. This feature can help consumers be more mindful about their spending so they don’t run out of money before their next paycheck.
Getting a debit card generally doesn’t involve a credit inquiry. Debit cards are typically included at no extra charge when you open a bank account. You can deposit money into your bank account to increase your spending power. You can easily access your funds at an ATM or when making purchases in-store, online or over the phone.
Debit cards also operate like ATM cards by providing access to your cash at ATMs. Some stores also allow customers to get cash when making a purchase. However, stores may limit how much cash back you can receive.
While debit cards can help you avoid debt, they don’t build a credit history. Most banks don’t report your transaction history to the three major credit bureaus.
Debit cards typically don’t earn rewards or provide valuable benefits that many credit cards do. In order to access those features, you’ll need to sign up for a credit card that offers them.
When an emergency strikes, many consumers turn to their credit cards to cover the bill. Debit cards can’t provide the same emergency funding since you’re limited to the balance in your bank account. In these situations, consumers may have to rely on riskier financing options that often carry higher interest rates. Payday loans, for example, can have onerous fees and interest rates that make them harder to pay off.
A debit card lets you access money and make purchases in many ways. You can withdraw cash or make a deposit at an ATM, or make purchases like a credit card. Debit card purchases can also be made by swiping, inserting or tapping your card and entering your PIN to authorize payment. In all cases, the money is withdrawn from your bank account balance so you don’t go into debt.
Debit and credit cards both offer fraud protection but operate very differently — which makes choosing a debit versus a credit card an easy choice. When fraud happens on a debit card, the money is already withdrawn from your account, and you’ll have to file a claim and wait for the money to be returned — assuming the claim is approved. Credit cardholders, on the other hand, can dispute fraudulent credit card transactions and avoid paying for those charges until the bank completes its investigation.
Debit cards are linked to your bank account, and the money is withdrawn as you make purchases. This feature prevents you from going into debt, because you can’t spend more than the balance in your bank account. Using a debit card is a popular payment method for consumers who want to eliminate or avoid credit card debt.
Yes, you can use debit cards with a Visa, Mastercard, American Express or Discover logo to make purchases like a credit card. Simply tap, swipe or insert your card at the terminal, then sign the receipt as if you were paying with a credit card. As you make debit card purchases, the money is withdrawn from your bank account.
When choosing between a debit versus a credit card, the best option for you depends on your goals. Credit cards are ideal for people who can avoid overspending and want to earn rewards on their purchases. Debit cards are a good payment option for those who want to avoid debt or are unable to get approved for a credit card.
The content above is not provided by any issuer. Any opinions expressed are those of LendingTree alone and have not been reviewed, approved, or otherwise endorsed by any issuer. The offers and/or promotions mentioned above may have changed, expired, or are no longer available. Check the issuer's website for more details.
