This will give you an overview of debit cards vs credit cards and how they compare. This will help you understand which type of card is best to use when you want to splash out money on a significant purchase or just spend a few bucks on a bare necessity.
The article covers:
- Debit vs credit card comparison
- Features, fees, and eligibility
- Pros and cons
- Guide on which one to use
Debit Cards vs Credit Cards
As much as 80% of consumers prefer using cards, i.e., 54% prefer debit cards while 26% opt for credit cards. Consider that more than 191 million adult Americans have a credit card while the total number of debit cards in the US reached 5.36 billion.
The main difference between a debit and a credit card lies in the ownership of the money spent. Namely, when paying with your debit card, you’re spending the money you’ve earned or saved.
On the other hand, when paying with your credit card, you’re spending money lent to you by a credit card company with the liability to repay it, usually until the end of the month.
Your financial situation and how you handle money dictate whether credit cards or debit cards are a better solution for you.
What is a debit card?
A debit card gives you access to your checking account that you’ve opened at a bank or credit union. Unlike checks, you don’t have to wait for several days for the transaction to clear and can make instant payments instead. You can also withdraw cash from an ATM in the amount that you have at your disposal. Some cards allow an overdraft, i.e., you can withdraw more than what the bank account holds, but you’ll be charged interest. Your credit score isn’t affected in any way when using your debit card.
It’s not a rare occasion for banks to involve you in their cashback program to encourage debit card usage and give 1% cash back per $3,000 spent in purchases each month.
Almost all brick-and-mortar businesses accept debit card payments. Besides, using your debit card online and via online banking portals, you can make purchases, pay bills or simply check your balance via online banking.
Features and Fees
Not all debit card features are the same for every card and equally available to every customer. The banks decide what features their debit card will offer. Debit card information regarding features and charges is outlined on the ‘terms and conditions’ page of the bank’s website or in the debit card agreement. You can simply talk to one of the bank’s representatives via phone or at the local branch. Debit card fees and features include:
- Linked checking account – allows you to access funds in your checking account
- ATM access – get instant access to your funds via ATMs
- Contactless payment – pay quickly and easily using PayPass, payWave, or a digital wallet
- Online banking – check your balance or make payments online
- Possible overdrafts – spend more than you have but pay high-interest fees
- Chargeback inquiries – dispute your charges or transactions and demand for chargebacks
- Rewards and perks – cashback debit cards receive some promotions, reward points, and cashback on tap-and-go purchases, depending on the bank’s policies
- Cancellation options – cancel your debit card if you lose it and keep thieves at bay
- PIN protection – use your personal identification number (PIN) to withdraw cash from ATMs or pay for purchases over $100
- Full or limited liability in case of fraud – you may be fully responsible for the losses, or the damage may be limited to $50 if you promptly inform the bank about the debit card loss
- Card replacement fees – pay no replacement fees for your expired debit card, but rush replacements may deduct typically from $5 to $30 from your debit account
- No interest rates – make unlimited use of your debit card
- Monthly service fee – be charged a monthly service fee for holding a debit card (ranging from $1 to $30)
- Overdraft fees – avoid overdraft fees by contacting your bank and opting out of the service (often around $35 per failed transaction)
- ATM withdrawal fees – avoid using third-party ATMs or ATMs abroad to dodge withdrawal fees (usually around $2 – $3 per transaction)
- Foreign exchange fees – expect hitting international conversion margins when using your card abroad
To apply for a debit card, you need to be an 18+-year-old checking account holder in the bank to apply for the debit card. However, a minor can own a joint checking account with their parent or legal guardian from the age of 13 and get a debit card with a limited daily withdrawal amount and spending limits. Once they turn 18, this bank account automatically turns into a regular checking account free from the previous limitations.
What’s more, you don’t have to be a US citizen to open an account or be eligible for a debit card, but you must provide at least two proofs of identification or one ID form and a bill addressed to you. There are no debit card charges for issuing the card. Some banks don’t ask for an initial deposit into your account, whereas others ask for as much as $100.
Qualifying for a debit card doesn’t come with specific standalone criteria, i.e., your credit history or employment status aren’t considered for issuing a debit card. Still, the type of debit card (regular, platinum, silver, gold, etc.) depends on the amount maintained on your debit card balance. Most of the accounts automatically come with a debit card, while others demand that you request one.
|👍 No debt||👎 Risk of theft|
|👍 Easy to obtain||👎 No grace period|
|👍 No annual fees||👎 Less fraud protection|
|👍 Inexpensive to use||👎 Few rewards or promotions|
|👍 Instant access to cash|
|👍 Walk cashless and secure|
|👍 Helps you keep track of your spending|
|👍 Cashback on tap-and-go purchases|
What is a credit card?
A credit card is a revolving line of credit that comes with a borrowing limit and belongs to the group of debt instruments. The limit depends on your annual income and is approved by the bank. You can make purchases spending the money lent by the financial institution up to the limit set based on your creditworthiness. Then you can repay the accrued debt by the end of the month without interest and bolster your credit score. Should you fail to repay it past its due date, the outstanding balance transfers for the following month, and you can repay the debt over time with interest.
Interest rates and other fees are some of the disadvantages of using a credit card that the card provider sets at their own discretion. The interest rate is highly dependent on the terms of agreement with your card issuer – it may be a fixed or variable annual percentage rate (APR).
You can make cash withdrawals directly from an ATM, or you can take your credit card to a bank that offers advancement through the payment network that your credit card uses and get cash. In such cases, showing your ID is mandatory.
Finally, credit card advantages include reward points, promotions, flyer miles, cash back, and other gifts awarded to you for using your credit card.
Features and Fees
The most general credit card features and fees are the following:
- Contactless payment – you don’t need to insert your PIN for purchases under $100
- ATM access – withdraw money at a high fee
- Online banking – check your balance, view credit card transactions history, and make payments online
- Grace period – repay your outstanding debt within 44-55 days without interest
- Minimum purchase amounts – the merchant may decide to impose a credit card transaction minimum (must be under $10)
- Balance transfer – move your outstanding debt to another credit card that has significantly lower promotional interest rates and more benefits
- Price protection – get a refund of the difference paid if the product’s price has reduced
- Zero liability policy – enjoy credit card purchase protection and get your money back for unauthorized payments and theft for 90 days
- Reward incentives – earn reward points (redeem them for cash or merchandise), travel miles (get a free trip or a discounted service), and gifts
- An annual fee – Pay an annual fee for using the credit card ( from $0 to $700)
- Credit card surcharges – you may have to pay a surcharge for credit card purchases imposed by a merchant (up to 4%), highlighting the difference between credit and debit transactions fees
- Credit card convenience fees – you may have to pay a surcharge on credit card transactions added by merchants, governmental agencies, or educational institutions across various states
- Cash advance fees – cash advances come at a high fee (usually from 25.40% to 36%)
- Balance transfer APRs – pay an APR of your balance transfer transactions (17.96% on average)
- Foreign transaction fee – pay an FX fee for making foreign transactions that pass through a foreign bank or in a different currency (typically from 1% to 3%)
- Card replacement fees – debit cards vs credit cards replacements are no different in the fact that expired card replacement comes at no charge, but a substitute for a lost card indeed incurs fees (typically from $5 to $30)
To become eligible for receiving a credit card, you must be at least 18 years old, and you need to report sufficient income as proof that you’ll be able to repay the money you’ll borrow. If you’re a minor, you can be added to the card by your parent or legal guardian as an authorized user.
When making credit card comparisons, you’ll see that the eligibility criteria depend on the credit card company. Mainly, you don’t need to be a US citizen, and your credit score doesn’t need to be excellent. You may still be eligible for a credit card with a lower credit card score, but it will come with a higher APR. Some card issuers may check your criminal records. Credit card information that you may need to provide during the application includes personal, contact, financial, and authorized user information if any.
|👍 Builds credit||👎 Annual fee|
|👍 Purchase protection||👎 Interest rates are high|
|👍 High spending limits||👎 Risk of debt|
|👍 Better fraud protection||👎 Harder to obtain|
|👍 Pay after a grace period|
|👍 Receive more reward points|
|👍 Hundreds of credit card types|
Cards are nowadays designed in the same way, so there’s no distinction between debit card protection vs credit card protection. When making contactless payments, there’s no possibility of making a double payment when swishing with your card at the terminal because the transaction generates a unique authentication code that is validated only once.
The built-in chip in near-field communication cards (NFC cards) is armed with a cryptographic key that safeguards you from unauthorized scans of your wallet by “passers-by.” Debit card vs credit card fraud is kept to a minimum due to the safety measures in place.
Which is better: a credit card or a debit card?
They are both convenient payment methods but in different respects.
Debit cards are the go-to option if you:
- would like to refrain from overspending
- avoid carrying cash with you
- are bad at managing debts
- want to have instant access to your account
- want to keep track of your spending
- want to claim cashback on tap-and-go or online payments
- make small everyday purchases like groceries or staples
The distinction between credit cards vs debit cards comes with pros and cons, however, credit cards are the desired option if you:
- want to spread the cost when making big purchases
- wish to earn premium rewards
- enjoy the cashback scheme
- make hotel and car rental reservations
- need to build a credit score
- are disciplined and can use it responsibly
- have a higher income and can afford it
- are looking for full liability protection from unauthorized charges
- frequently travel and want to steer clear from fraudulent charges
- strive to improve your credit score and qualify for a loan in the future
- seek for purchase protection with extended warranties and reimbursements
So what’s your choice when it comes to debit cards vs credit cards? Debit cards are convenient payment methods that give you fast access to cash and keep you safe from incurring debt. Credit cards, on the other hand, include lots of benefits, including rewards, credit building potential, and zero liability in case of fraud.
The bottom line is: if you lack credit management skills, stick to debit cards. Otherwise, opt for credit cards because they give you plenty of financial benefits.
When you’re paying your bill, the merchant may ask you whether you are making a credit or a debit payment. That refers to how you want your payment to be processed. You can still make a credit payment with your debit card if it has such a feature approved by the credit issuer. This is regarded as an ‘offline transaction’ and typically takes a few days to be reflected in your account balance.
Credit cards allow you to withdraw cash from any ATM. Cash withdrawals and cash advancements from the local branch through the payment network that your credit card uses are possible but they are accompanied by an extremely high fee.
CVV stands for a Card Verification Value. This number is essential for making online purchases and payments, and it is highly advisable not to share it with anyone. Visa, Mastercard, and Discover place a three-digit number on the card’s back, while American Express uses a four-digit code placed on the card’s front, called a CID.
You can transfer money from a credit card to a debit card if your credit card allows that. Mind the fact that a balance transfer fee applies. The amount you can transfer from the card depends on your credit limit and any other terms and conditions. It’s always a better idea to use your income or dip into your savings account on such occasions.
Credit cards are more convenient if you make significant purchases, and they come with a credit line issued by the bank rather than using your available personal finances. If you compare debit cards vs credit cards, another difference is that credit card users enjoy a $0 liability against fraud while a debit card user faces uncovered payments or pays at least $50.