Credit Card vs. Debit Card

Unsure of whether it’s safer to use your credit card versus your debit card for a purchase? Well, the answer takes a bit more nuanced. There are some instances where a debit card might serve you better if you have specific goals like limiting your spending, but credit cards offer distinct advantages and protections that are hard to top.

Same look, different functions

Credit cards and debit cards might look very similar, but they function much differently.

A purchase made with a credit card means you’re deducting the purchase amount from your line of credit that’s made available by the issuer. Say your credit limit is $2,000 and you charge $1,000. After your transaction is completed, you’ll have $1,000 left to spend. When your credit card payment is due, you pay your total balance of $1,000. As a result, your available credit is replenished to $2,000. But if you only pay $500 toward your balance, $500 will be rolled over to what you owe the next month, in addition to interest.

With a debit card, you don’t borrow funds. Instead, your debit card is linked directly to your checking account. When you swipe your debit card for a purchase, the amount is deducted directly from your account. You can add to your account to increase the amount of money you can draw from at any time. With a credit card, you’re constrained to what the credit card issuer sets as your credit limit.

Benefits of a credit card

One of the main benefits of credit cards is their ability to help build, maintain or improve your credit when used responsibly. Credit card payments are reported to credit bureaus, which means that if you’re making your payments on time and keeping your credit utilization ratio low, you can maintain or build a good credit score. Lenders weigh your credit score heavily when evaluating whether or not you’ll be approved for a loan for a car or house. The better your credit score, the better your odds of approval (although nothing is ever guaranteed). Your credit score will also be a factor in the interest rate you’ll be assessed on your loan. A lower credit score usually means you’ll deal with higher interest rates since you’re viewed as a riskier borrower.

Reward programs are another advantage of credit cards that aren’t characteristic of traditional debit cards. Not all credit cards offer rewards; they can be straightforward and used by cardholders for the express purpose of borrowing from a credit line without additional frills. But they can also boast lucrative perks in the form of miles, points and cash back on all or specific types of purchases. By strategically using these rewards, credit cards can help you save money. For example, you may be able to earn cash back on certain expenses or miles to reduce the cost of your next vacation. There are tons of reward credit cards available; the right one for you depends on your spending habits, credit score and what kinds of rewards are most relevant to your lifestyle.

Benefits of a debit card

Debit cards are beneficial for consumers who want to avoid getting into significant debt. There’s a reason why the average American has an average credit card debt of over $6,000, according to an Experian debt study. Credit cards are often an invitation to overspend since you’re not limited to what money you have now, but by your overall credit limit. With debit cards, cardholders are limited by their checking account balance, which may keep spending within more reasonable ranges.

Debit cards are also typically easier to acquire than a credit card. An application for a new credit card requires a hard credit inquiry into your financial history and an evaluation period by the lender. In contrast, you can conveniently obtain a debit card from most banks when you open up a checking account.

Withdrawing money from an ATM is also simpler with a debit card. It’s normally free to withdraw cash or only a few bucks if you’re using an out-of-network ATM. Using a debit card to take out cash also means you won’t be liable for cash advance fees commonly found in the terms and conditions of credit cards. Fees between 3% and 5% may be assessed on cash advances from credit cards, which can add up if you’re planning on withdrawing a lot of cash.

Security of both

Credit card users are protected from fraud by the Fair Credit Billing Act (FCBA), which means you aren’t held liable for someone getting access to your account and making unauthorized charges. The most a credit card issuer can charge you is $50, but it’s rare you’ll be charged anything at all. After the fraud has been spotted and verified, the credit card issuer credits the charges back to your account.

In addition to the official legal protection, credit card issuers often include their own purchase and travel safeguards as well. It’s not uncommon to see purchase protection, travel insurance, credit monitoring services and rental car damage or loss insurance as free or discounted features for being a card member. You’ll need to read into the terms and conditions of your own credit card, as these protections vary depending on the credit card.

Debit card users are protected from fraud under the Electronic Funds Transfer Act. However, this law is less potent than the law protecting credit cardholders. If your debit card is used fraudulently, you must report it within 48 hours. After 48 hours, you’ll be liable for up to $50 for any transactions made without your permission. And if you drop the ball for another 60 days, you can be liable for up to $500. After two months, there is no limit to your liability, so all of your money might be lost for good.

With all things said, credit cards offer substantially more safety and protection for online shopping purchases, travel and large purchases.

In a nutshell

Both credit cards and debit cards are useful for different reasons. Credit cards come in handy with their suite of purchase protection services and can help you establish a healthy credit score if you use responsible payment behavior. Debit cards are ideal if you’re trying to limit your spending and don’t want to be tempted into lavish spending that credit cards may encourage.

Michelle Wilson

Michelle Wilson is a San Diego-based writer specializing in the topics of personal finance, technology, and culture. You can find her writing on sites such as HP Tech Takes, The Simple Dollar, and San Diego Magazine. In her spare time, she enjoys finding new cats to follow on Instagram.