If you are wondering whether you should get a debit or credit card, you’re in luck. In this blog, we have provided a side-by-side comparison of credit card vs. debit card to help you choose the best one for you.
While credit and debit cards may seem the same with identical rectangle-shaped designs, 16-digit card numbers, EVM chips, and magnetic strips, there is a substantial underlying difference in both. Both plastic-based currency makes it easier to make purchases and transactions.
Debit cards allow you to spend money by withdrawing the funds from your account whereas credit cards allow you to borrow money from the card issuer up to a particular limit to purchase items. The convenience and security they offer are excellent but they have important differences that everyone should be familiar with.
Let’s dive in to learn more about the difference between debit and credit cards.
What is a Credit Card?
A credit card is a form of plastic currency issued by a financial institution, generally a bank. It allows the cardholder to borrow funds from the institution up to a particular limit. However, there are many stipulations involved. For starters, the cardholder agrees to pay the money back to the financial institution with interest.
If you’re wondering what credit cards should I get, there are a wide variety of categories ranging from standard to premium cards. Here are the different types of categories of credit cards-
Standard Cards: These types of cards simply offer credit to the cardholder for making transactions, shopping, or cash advances. Generally, standard cards don’t charge any annual fee.
Premium Cards: As the name suggests, premium cards offer premium perks like concierge services, airport lounge access, special event access, and more. However, these cards generally charge a hefty annual fee.
Reward Cards: These types of cards offer various types of rewards such as cash back, travel miles, and other benefits based on how the cardholder spends.
Balance Transfer Cards: These cards have low-interest rates and introductory fees on balance transfers compared to other types of credit cards.
Secured Credit Cards: These cards always require an initial cash deposit that is held by the issuing authority as collateral.
Charge Cards: Charge cards don’t have any spending limit but also don’t allow unpaid balances to carry to another month.
There are plenty of benefits of credit cards for the cardholder. For instance, you can avail of cash back, discounts, travel points, and many other benefits that are not available to debit card users.
When choosing a reward card, pay attention to the options available for redeeming them and whether rewards can expire or not.
Benefits of Credit Cards
You must be wondering why are credit cards more convenient than Debit cards. There are a lot of benefits of credit cards over debit cards. However, there are also some drawbacks too. Let’s take a closer look at the advantages of using credit cards.
Build Credit Score
Every expenditure from a credit card is listed in your credit report. This includes positive histories like on-time payments and low credit utilization, as well as negative histories such as late payments and delinquencies. Your credit history is used to calculate your credit score. If you are a responsible cardholder, you can increase your credit score with a positive history of on-time payments and keeping your card balances low with respect to your card limits.
Moreover, many credit card companies also offer free credit score tracking so you can keep track of your progress.
Warranty and Purchase Protection
One of the best benefits of credit cards is that they often provide warranty and purchase protection separate from the retailer or brand of the product. If an item bought with a credit card is defective or breaks down, you can check with your credit card company to see if they will provide coverage for your loss. Additionally, you can also get built-in purchase and price protection to help you to replace the item or refund the price of the product.
In most cases, credit cards offer better fraud protection than debit cards. If your card gets stolen and you report the loss timely, you are only liable to a maximum amount of $50 after the card disappeared. Debit card users also get the same protection if they report the loss within 48 hours of theft or loss. After 48 hours, the debit card holder’s liability increases to $600 and after 60 days, there is no limit.
According to the Fair Credit Billing Act, credit card users can dispute unauthorized purchases or purchases of damaged goods. If the same transaction was done with a debit card, the charge cannot be reversed unless the merchant is willing to do so. Moreover, debit card theft victims don’t get their full refund until an investigation is conducted and finished.
Drawbacks of Credit Cards
While there are certain benefits of using credit cards over debit cards, there are some inherent disadvantages too. Here are the most common drawbacks associated with credit card usage.
Unnecessary Spending Can Lead to Debt
When spending with a credit card, you are actually using the bank’s money and not your own. This money has to be repaid to the bank with interest. At the very least, you are obligated to make the minimum payment due each month. Amassing high balances on multiple credit cards can make it hard to keep up with payments and can lead up to a high amount of credit card debt.
Decreases Credit Score
While paying your bills on time and keeping low balances on credit cards can increase your credit score, the opposite can hurt your credit score. Misusing credit cards and late payments can hurt your credit score.
Interest and Fees
As mentioned above, using a credit card is like taking a short-term loan that has to be paid back with interest. The interest rate and the credit card company fees are used to calculate the Annual Percentage Rate(APR). The higher the APR, the more interest is accrued if you carry balances from month to month.
These are some of the most common disadvantages of using credit cards. However, if used properly credit cards can offer a ton of benefits and can also help in increasing your credit score. Now that we have a basic understanding of credit cards and their pros and cons, let’s take an in-depth look at Debit Cards.
What is a Debit Card?
A Debit Card is a type of plastic currency that makes transactions by deducting money directly from the spender’s savings or current account, instead of the bank or the card issuer. Debit cards offer the same convenience as credit cards and often the same consumer protection and benefits if they are issued by major payment processors like Mastercard or Visa.
There are basically three types of credit cards-
Standard Debit Cards: These cards deduct the amount from the spender’s bank accounts.
Electronic Benefits Transfer(EBT) Cards: These types of cards are issued by state or federal institutions to allow users to reap their benefits.
Prepaid Debit Cards: Prepaid cards give users without a bank account a way to make transactions up to the amount that was preloaded on the card.
Debit cards are the best option for an average layman as they don’t incur any interest and there is no annual fee associated with them.
Benefits of Debit Cards
Similar to credit cards, there are certain perks to using debit cards. Let’s take a look-
When using a debit card, the user is essentially using their own money, instead of the bank’s. When paying with plastic cards, people usually end up spending more than their budget. Impulsive spenders can avoid unnecessary spending by using a debit card and sticking to their budget. This can be handy and keep you away from high-interest debts.
While credit cards offer better protection, debit cards are not that far behind. Debit cards issued by reputed patent processors like Mastercard or Visa are offering the same protection as credit cards to debit card users given that theft or fraud is reported on time.
Your liability for fraudulent purchases and transactions is determined by the time frame in which it’s reported. Since a debit card is directly linked to your bank account, fraudulent transactions can quickly drain your account and even lead to an overdraft.
No Annual Fee
One of the best advantages of debit cards is that they don’t incur any annual fee whatsoever. Moreover, debit card users are not charged for withdrawing cash from an ATM. On the other hand, credit cards charge cash advance charges and very high interest for withdrawing cash.
Read Also:- Best College Student Credit Cards of 2023
Drawbacks of Debit Cards
Similar to credit cards, there are also some inherent disadvantages of using debit cards.
Lack of Rewards
If you are a debit card user, you won’t earn any cash back, rewards, miles, or other benefits if you don’t have a rewards checking account. Rewards can be extremely beneficial depending on how you redeem them. You will miss out on various perks and benefits when using a debit card.
No Influence on Credit Score
A high credit score can open a lot of doors in the financial world. However, using a debit card linked to your bank account has no effect on your credit score whatsoever. A debit card alone is useless in establishing a positive credit score.
While debit cards don’t charge an annual fee, there are other types of fees like having a checking account, maintenance, overdraft fees if you spend more than your limit, returned-item fees, and foreign ATM fees for using another bank’s ATM machines.
Credit Card vs. Debit Card: Side-by-Side Comparison
Still not sure which one is better? Fret not, we have also provided a side-by-side comparison of debit cards vs credit cards to give you a general idea.
|Deduct money directly from your bank account
|Borrow funds from the bank to pay for goods and services.
|Source of Funds
|Personal Account of the User
|Credit extended by the card issuer. It's like a short-term loan with high-interest rates.
|Spend the money available in your bank account.
|Spend more than you have by taking money from the card issuer.
|No Bill or Statement
|Users get a detailed bill each month with details of their transactions.
|No Payment required
|A bill needs to be settled every month since you are spending borrowed money.
|Fee and Charges
|Annual fee and a single-time PIN registration fee
|Multiple fees are incurred like joining fee, annual fee, late payment fee, etc.
|Interest is charged on the outstanding amount if not paid by the due date.
|Limit of Funds
|You can access the entirety of funds available in your bank account.
|There is a pre-determined limit on credit cards.
|No or Minimal Rewards
|Bunch of rewards like miles, cash backs, reward points, etc.
|No or Minimal Privileges
|Various dining, traveling, and entertainment privileges depend on your card.
|Lost Card Liability
|Most credit cards offer full liability protection.
Which is Better? Debit Card or Credit Cards?
As mentioned above, both credit cards and debit cards have their own pros and cons. There is no right answer as to which is better. However, there are many instances where you can choose to use a debit or credit card.
If you are an impulsive spender- Debit Card: You should definitely use a credit card if you spend impulsively. Since the money is directly debited from your bank account, you can manage your expenses easily and refrain from overspending.
Cash Withdrawal- Debit Card: There are no additional expenses when withdrawing cash from a debit card. However, if you withdraw cash from a credit card, the bank registers that as a short-term loan with a high rate of interest.
Shopping and Online Transactions- Credit Card: Credit cards are by far the safest option when making transactions online. It offers better fraud protection and the amount is easily reversed to your credit card.
Expensive Ticket Purchases- Credit Card: Most credit cards offer the convenience of splitting your monthly bill into EMIs. This makes it the best option to book expensive tickets as you can pay in installments.
Vacation Expenses- Credit Card: Most credit cards are accepted worldwide. If you are on an overseas vacation, you can just use your credit card and save yourself the hassle of carrying foreign currency.
- Debit cards deduct money straight from your bank account whereas credit cards provide you with credit issued by a financial institution or a bank.
- Credit cards offer better protection against fraud and fraudulent purchases as compared to debit cards.
- In recent years, debit cards also offer the same level of fraud protection as credit cards. Most credit cards also don’t charge any annual fee.
- While debit cards help avoid the accumulation of high-interest debt. Credit cards offer better benefits and perks to the user.
- Both debit and credit cards are better in different situations. While the debit card is the best choice for cash withdrawal, credit cards are best for online transactions and big transactions.
Frequently Asked Questions(FAQs)
Both credit cards and debit cards have their own pros and cons. It is better to research and figure out which one is best according to your requirements.
Yes, there is a limit on cash withdrawals on debit cards. However, the limit often differs from bank to bank.
Yes, you can use your credit card to withdraw cash from an ATM in some cases. This is known as a credit card cash advance. It allows cardholders to withdraw a set limit of cash via credit cards.