You probably have both debit and credit cards, but do you know the difference?
A debit card allows you to use funds that you've already deposited, while a credit card offers you a loan that you must pay back in the future. Furthermore, credit cards can offer you additional rewards and benefits that aren't available when you use a debit card. It's important to understand all of the differences between these two types of payment cards and the potential advantages and drawbacks of each.
How Debit Cards Work
A debit card allows you to make charges using money that that's already on account with a financial institution. For example, most checking accounts offer customers a debit card that can make purchases using the funds already in your checking account. Each time a purchase is made, that amount is subtracted or debited, from the account's available balance. Another example of a type of debit card is a prepaid card that can be purchased from many grocery stores, drug stores, and office supply stores.
Other debit cards include reloadable cards that have become more popular in recent years. These cards allow users to continually add funds to their accounts, much like a checking or savings account. With each type of debit card, any purchase made beyond the account's current balance will be declined. However, some banks offer overdraft protection that can allow debit card users to make purchases that exceed their available balance in specific situations.
How Credit Cards Work
A credit card is a type of payment card that allows purchases to be made on credit, which is a kind of loan. Every charge that's made to a credit card represents a loan against a line of credit that must be repaid. Interest is incurred against each charge; however, most credit cards offer a grace period that allows you to avoid interest charges when you pay your entire statement balance in full before the due date.
With most credit cards, each account is assigned a credit limit, and your purchase can be declined if you exceed that limit. However, many credit card issuers will approve purchases beyond the account's credit limit on a case by case basis. Furthermore, there are some credit cards that have no preset spending limit.
Beyond the ability to make purchases on credit, credit cards can offer some features and benefits not found on debit cards. For example, many credit cards offer rewards for spending in the form of points, miles or cash back. Credit cards can also offer you numerous travel and shopping benefits that can be quite valuable.
Building Credit With a Credit Card
The biggest difference between and debit and a credit card is you will have to apply for a credit card, which means that your credit history and credit scores be examined to determine your creditworthiness. And since credit card use means taking out a loan, your balance and payment history will be reported to the major consumer credit bureaus.
If you make your payments on time and keep your level of debt low, then credit card use will add to your positive credit history and raise your credit scores. But if you fail to make your payments or incur a large amount of debt, then credit cards can hurt your credit history and credit scores.
And with any line of credit, there's always the possibility to incur debt and interest charges. But with a debit card, you'll never pay interest charges or find yourself in debt.
The Ease of Getting a Debit Card
In contrast, there's very little you need to do get a debit card. Anyone can purchase a prepaid debit card at a store using cash, regardless of their credit history, so long as you can confirm your identity.
At the same time, the use of a debit card won't ever have an effect on your credit history or credit scores—positive or negative. Debit cards that offer rewards for spending are extremely rare, and most debit cards only offer a fraction of the cardholder benefits that credit cards do, if any at all. If you are looking to build credit, but have little or no credit history, you can look into a secured credit card or starter credit card. A secured card is one that is usually easy to get as your credit limit is based on a deposit you make when opening the card.
Debit Card vs. Credit Card Fraud
Also, your credit card purchases are protected by the Fair Credit Billing Act, which mandates that cardholders are cannot be responsible for more than $50 in the event of a fraudulent transaction. And in practice, all of the major payment networks, including Visa, Mastercard, American Express and Discover, waive that amount by offering zero liability policies.
In contrast, your debit card purchases will be subject to different laws that give you less protection in the event of fraud, theft or the failure of a merchant to deliver the exact goods or services that you paid for.
When you understand the differences between debit cards and credit cards, you'll be able to choose the right type of payment card for your needs.