What’s the Difference Between Debit Cards and Credit Cards?

What’s the Difference Between Debit Cards and Credit Cards? article image.

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Debit cards and credit cards may look the same and function similarly when you use them to make purchases, but they differ greatly in a few key ways. Here's what to know about how credit cards and debit cards are different, and how to get the most from your cards no matter which one you prefer.

Debit Cards vs. Credit Cards
Debit CardCredit Card
Buy now, pay nowBuy now, pay later
Use money that's already in your linked accountBorrow money from credit card issuer to make purchases
Pay no interestPay interest if you carry a balance month-to-month
You may be fully liable for fraudYou have limited or zero liability for fraud
Spending limited to amount in your linked accountSpending limited to your assigned credit limit
No credit check required to get cardCredit check required to get card
Use is not reported to credit bureaus and does not affect your creditPayment history is reported to credit bureaus and can affect credit score positively or negatively

What Is a Debit Card?

There are two types of debit cards: cards issued by your bank and prepaid cards. Bank-issued debit cards are connected to your checking account and can be used to make purchases or withdraw cash from your account at ATMs.

When you use your debit card for a purchase, money is taken out of your linked account and transferred to the merchant. You're not borrowing money, so there are no interest charges. Using a debit card is essentially like spending cash without carrying checks or paper money.

Prepaid debit cards are issued by payment networks such as Visa and American Express and are sold online, at banks and by retailers such as grocery stores and convenience stores. Prepaid debit cards are often used by people without bank accounts. You "prepay" the card by loading it with money using cash, check, a linked bank account, employer direct deposit or government benefits. You can use the card to make purchases or withdraw cash at ATMs up to the amount loaded onto the card. As you make purchases and use up the funds, you can load it with more money.

Using debit cards can help you live within your means, since spending is limited to the money in your account. No credit check is required for either type of debit card. Some prepaid and bank debit cards offer rewards for spending, although this is more common with credit cards. There's no fee to get a bank debit card or use an ATM within the card's network. Prepaid debit cards, on the other hand, may charge high fees for maintenance, ATM use or reloading, making them a pricey option.

What Is a Credit Card?

A credit card lets you make purchases and incur debt with the understanding that you'll pay back the credit card issuer later. When you make a purchase with a credit card, the card issuer pays the merchant, and the purchase amount is added to your credit card statement.

At the end of the billing period (usually monthly), the card issuer sends you a statement that lists out the purchases you made and the total amount you owe. You'll typically be granted a grace period of 21 to 30 days to pay your balance or make a minimum payment to keep your account in good standing. If you don't pay the full balance within that time, any balance carried over begins accruing interest.

To get a credit card, you must apply for the card and undergo a credit check. If you're approved, the card issuer sets a credit limit (the maximum amount you can borrow). As you pay back your balance you borrow, it's yours to borrow again.

Some credit cards offer rewards, such as cash back or airline points, based on your spending. Credit cards are useful in emergencies since you can use them to make purchases without having enough money in your bank account to completely cover the purchase.

Carrying a credit card balance from one month to the next incurs interest that adds up over time. Interest rates on credit cards are higher than most other forms of credit. Cards may also charge fees such as annual fees, late payment fees, foreign transaction fees or balance transfer fees. Using a credit card to get cash from an ATM is called a cash advance, and it may incur a fee as well as interest on the amount withdrawn that starts accruing immediately. Cash advance interest rates can be higher than purchase interest rates.

Can You Build Credit With a Debit Card?

Unlike credit card usage, your use of a debit card is not reported to credit bureaus and won't affect your credit score. There are some debit cards on the market that may be able to help you build your credit, such as the Extra card, but these cards are rare.

Most credit card issuers report your account activity, such as card balance and payment history, to consumer credit bureaus, where it becomes part of the credit report used to calculate your credit score. A credit card can affect your credit score positively or negatively, depending on how you use it.

A credit card can help you build credit if you make all your payments on time and keep your balance low. Credit utilization is an important credit score factor that considers how much of your credit line you use; try to keep this ratio below 30%. If you're a big spender, your credit utilization can easily creep above 30% and hurt your credit score in the process. Missing a credit card payment can also have a major negative effect on your credit.

Worried a credit card will spur overspending? Build credit safely by using your credit card for a few small purchases each month and paying your balance in full and on time. If you can't pay the balance in full, make at least the minimum payment on time or your credit score could suffer.

How Fraud Protection Works for Debit and Credit Cards

Debit and credit cards offer different levels of fraud protection.

Credit Card Fraud Protection

The Fair Credit Billing Act (FCBA) protects consumers against credit card fraud. The most you can be responsible for is $50, and many card issuers offer zero liability—meaning you aren't responsible for any unauthorized use of your card.

The FCBA also protects you in disputes with merchants over credit card purchases. For example, if a laptop you buy online arrives broken and the seller won't issue a refund, you can ask your credit card company to refund your money.

Debit Card Fraud Protection

The Electronic Funds Transfer Act protects consumers from debit card fraud, but the protections are more limited than for credit cards. If you report a debit card as lost or stolen before the thief uses it, you're not responsible for any future fraudulent charges. Once fraudulent charges take place, you must report them within two business days, or be responsible for up to $50. If you don't report the charges within 60 calendar days, you may be responsible for up to $500. After 60 calendar days, you may be fully liable for fraudulent charges, even if your debit account—and any accounts linked to it—are cleaned out.

Even if you report debit card fraud within an appropriate time, it can take up to two weeks for your bank to refund your money. To limit potential losses from debit card fraud, don't keep all your money in your linked checking account, or a thief with access to your debit card could empty it.

Prevent both debit and credit card fraud by protecting your cards, card numbers and PIN and checking your account activity regularly. Most banks and credit card issuers' mobile apps make it easy to check your account weekly or daily. If you spot suspicious transactions, take quick action to address it.

Which Type of Card Is Best?

Both debit cards and credit cards let you make purchases without carrying cash. Using debit cards is a straightforward way to stay within your budget. Using credit cards for everyday spending, online shopping, traveling or major purchases offers stronger fraud protection. Since getting a credit card requires a credit check, always check your credit report and credit score before applying.