Knowing the difference between credit cards and debit cards might seem like nothing more than bar trivia. Both cards do the same basic thing, right?
The truth is that debit and credit cards are more different than you might think — and knowing more about both might mean the difference between saving money and even improving your credit score.
Let’s cover some of the most important differences between credit cards and debit cards to help you decide which one is right for you.
Table of Contents
What are Debits?
A debit is a payment made by taking money directly out of your bank account. Most debits are done using a debit card issued by your bank. Major credit card companies (like Visa and Mastercard) produce debit cards, and you can use them everywhere you can use a credit card.
Debit cards also offer many of the same protections and benefits of credit cards, including refunds for fraudulent transactions.
You might prefer debit cards to credit cards because they don’t have annual fees or service charges. The only exception to this rule is prepaid debit cards, which often have an initial activation fee.
Debit cards also eliminate the possibility of racking up excessive debt. When you use your debit card, money is immediately removed from your bank account. Your bank might charge a hefty overdraft fee if you spend more money than you have. Also, if you don’t pay back your overdraft, your bank can draw money from your savings or shut down your card entirely.
Before you use your debit card, you must often enter a 4-digit personal identification number (PIN). PINs add another layer of protection to your debit card, along with fraud detection services from your bank.
What are Credits?
Credit involves borrowing money against a limit set forth by a credit card company or another type of lender. Major credit card companies like Visa, Discover and Mastercard issue credit cards to consumers after they apply and get approval.
When you’re approved for a new card, the credit card company will look at your income and credit score and decide how much credit they want to extend to you. This limit is your line of credit, and you can only spend up to your line’s maximum each month.
Once you hit your limit, you’ll need to pay back some of your balance before you can put new charges on the card.
Credit cards also charge interest on a month-to-month basis. The average interest rate for a credit card is 17.72%. However, you don’t need to pay interest on balances that you pay off every month. If you do want a credit card, it’s a good idea to pay off your balance in full before the end of each month to avoid paying excessive interest charges.
Debit vs. Credit: Similarities and Differences
Credit and debit cards are very similar and offer many of the same benefits, but they also have some differences, too.
Credit and debit cards both look the same and use a CHIP and PIN to complete transactions. They both have 16-digit numbers, 3-digit authentication numbers and expiration dates.
When you buy something online, you’ll have to enter all of this information to complete the purchase. Major credit card companies like Visa issue both credit and debit cards.
Allow You to Make Purchases Without Cash
Both credit and debit cards allow you to make purchases without cash or a check. Almost every business now accepts credit cards and you can use a debit card everywhere that accepts credit cards, too. You can also use your debit card to buy things online exactly like a credit card.
Have Fraud Protections in Place
Because credit and debit cards both come from credit card companies, they both have fraud protections in place.
If your account makes an unusual or large purchase, the card issuer will usually block the transaction or freeze your card. Both credit and debit cards also have rules in place that prevent you from being liable for fraudulent transactions.
For example, if someone steals your credit or debit card number and you report it as fraud, the card issuer will refund your money.
Interest and Fees
When you buy something using a credit card, you essentially borrow money from the credit card provider. Buying using a credit card gives you more time to pay back what you owe, but you also pay the credit card provider interest.
When you spend money using a debit card, you don’t borrow money. Instead, you deduct it from your account. You don’t pay any interest on debit cards, no matter how much you spend.
Some credit cards also have annual fees. Annual fees vary by card, and many credit card providers offer no-fee options that offer fewer rewards. You don’t have to pay any kind of fee to keep a debit card open. The only fee you’ll see is if you overdraft your account.
Rewards and Bonuses
You probably already know that rewards and bonuses are a big draw for credit card companies. From airline miles to cashback, credit card companies are always trying to up the ante with new and impressive bonuses.
Unfortunately, most debit card providers don’t offer bonuses or cashback. However, some banks are now taking a second look at the typical debit card structure and rethinking their rewards system.
For example, when you open a Zero-Fee Checking account with MoneyLion, you’ll get access to cash reward and gift card offers.
Protections and Safety
When you use a debit card, you need to enter your 4-digit PIN to authorize your transaction. This makes it very difficult to steal and use a debit card. If the thief doesn’t know the PIN, he can’t use the card.
As you might expect, it’s much easier for thieves to steal a credit card and fake a signature on your card than it is for them to figure out your PIN.
Your credit score is a three-digit representation of how responsible you are with your money. If you have a high credit score, chances are, you generally make your payments on time. If you have a low score, it might be because you often miss payments or max out your cards.
Most credit card companies report your credit activity to the major credit bureaus. A simple way to build credit quickly is to open a credit card, buy a pizza or cup of coffee once a month, then pay the card off in full every month.
Debit cards don’t affect your credit at all because you don’t borrow when you use one. Make sure you choose a credit card that reports to the three major reporting bureaus if you want to build credit.
Which Method of Spending is Right for You?
So, which is better — credit cards or debit cards? Well, it depends. If you’ve had problems with overspending in the past, a debit card can help you stay on track because it does more to prevent you from spending money you don’t already have.
You can often get more benefits and cash with a credit account as long as credit cards don’t offer too much of a temptation.
Many people choose to get both a debit card and a credit card. Debit cards are great for budgeting and keeping yourself on track with everyday spending. Your MoneyLion checking account gives you 0% APR cash advances on your debit card, so if you are budgeting but do come up short, you can add a little extra cash instantly at no charge.
What to Look for in a Bank that Offers Debit or Credit Cards
Look for these key features in debit or credit cards to help you choose the right bank.
No Extra Fees
Great banks know that today’s consumers don’t want to pay excessive fees or charges. Look for banks that offer free checking services, no service or overdraft fees and no ATM fees.
Rewards and Cashback
Look for a bank that offers free cashback rewards or bonuses on its products. MoneyLion even offers credit-card style perks on a debit card. From money back to free gift cards to your favorite stores, the possibilities are endless!
Sometimes, life throws you a curveball and bills are due before you’ve got cash in your account to pay them.
The best banks offer cash advance services, which give you access to a bit of your hard-earned money before payday, but can charge a lot for the service.
Look for a bank like MoneyLion that offers cash advance services without high fees or interest.
Credit Check and Monitoring
Do you know your credit score? Are you trying to raise your score and need to keep an eye on it? One of the biggest advantages of opening a credit card is the ability to do a soft check on your credit score.
Soft checks don’t lower your score but do allow you to see where you stand instantly. Look for a bank that provides credit score checkups and credit monitoring services to give you a hand if something goes wrong.
Safety as a Priority
Safety is one of the most important features a bank can have. Look for a bank that prioritizes safety features and has FDIC insurance to keep your money protected. Your bank should also offer fraud monitoring to spot and prevent identity theft.
Additional Financial Help
Whether you earn $100 a day or $100 an hour, you still might need additional financial services, like fast personal loans.
Your bank should also provide other financial services, like fee-free ATM access and investing assistance.
Spending Smart with Debit and Credit
Are you getting the most out of your bank? Visit MoneyLion to learn more about the benefits of opening a financial membership — and see all the advantages that MoneyLion can bring to your credit or debit accounts.