What Is 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? It’s easy to see why. Debit cards and credit cards are accepted at many of the same places. They both offer convenience and eliminate the need to carry cash. They even look similar.

The fundamental difference between a debit card and a credit card account is where the cards pull the money. A debit card takes it from your banking account, and a credit card charges it to your credit line.

What Is a Credit Card?

A credit card is a card that allows you to borrow money against a line of credit, otherwise known as the card’s credit limit. You use the card to make basic transactions, which are reflected on your bill; the bank pays the merchant, and later, when you receive your bill, you pay the bank.

You will be charged interest on your purchases. To avoid paying interest, don’t carry a balance over from month to month. Credit cards have high-interest rates, and your credit card balance and payment history can affect your credit score.

Paying on time and in full will help you avoid interest and late fees and maintain or even improve your credit score.

Below are other facts about credit cards:

  • The bank decides your credit limit based on your credit history.
  • Generally, you no longer have to sign for in-person credit card purchases.
  • You will owe interest on your purchases if not paid off in 30 days.

What Is a Debit Card?

Debit cards offer the convenience of a credit card but work differently. Debit cards draw money directly from your checking account when you make the purchase. They do this by placing a hold on the amount of the purchase. Then the merchant sends in the transaction to their bank, and it is transferred to the merchant’s account. It can take a few days for this to happen, and the hold may drop off before the transaction goes through.

You will have a personal identification number (PIN) to use with your debit card at stores or ATMs. However, you can also use your debit card without a PIN at most merchants. You will sign the receipt like you would with a credit card. Below are some other facts regarding debit cards.

  • You won’t pay interest on your purchases.
  • Your credit history will be unaffected by debit card spending.
  • Paying with debit will take the money from your account pretty much immediately.

Debit Cards vs. Credit Cards

Debit cards make it more difficult to overspend since you’re limited to only the amount available in your checking account.

With a credit card, you run the risk of spending beyond your means. Just because your credit limit is $1,000 doesn’t mean you can afford that sort of spending in your monthly budget.

Plus, debit cards offer the same convenience as credit without requiring you to borrow money or pay interest or fees on your purchases. Choosing debit is great for managing your money and helping you live within your means.

On the other hand, some credit cards offer additional insurance on purchases and can make it easier to request a refund or a return. However, many companies are reducing or withdrawing these benefits.

You should carefully read the disclosure information for your credit card to understand the benefits.

Finally, credit cards can help cover you in an emergency, giving you a month to come up with the cash before the bill comes due. This safety net could be helpful if you find yourself needing to pay for something big before a check comes in but beware: depending on credit for emergency spending sets you up for expensive interest if you can’t pay in full by the due date. A better solution is to keep an emergency fund on hand.