- Spending money on a credit card versus a debit card is the difference between spending on a line of credit and spending on your own checking account.
- Debit cards are great for sticking to a budget because you’re using money you already have in your checking account.
- But credit cards offer fraud protection and can earn rewards, but overspending can lead to costly debt.
- Read more stories from Personal Finance Insider.
Credit and debit cards work the same way: you swipe a card at the store when you make a purchase. But they are different in how they work and the benefits they offer. You may have already established spending habits with one or the other, but it may be worth revisiting debit and credit cards and seeing how they can each work for your finances.
Credit vs throughput: at a glance
Wondering what the difference is between spending with a credit card and a debit card? Here’s what you need to know.
- Credit card draw on a line of credit extended to a borrower by a credit issuer. The line of credit works like a loan where any amount charged to the credit card must be repaid. If someone doesn’t have enough funds to cover an expense based on the funds they have in their checking account, they can use a credit card to purchase that item.
- Debit cards draw on money that someone has already deposited in a checking or savings account. Someone looking to buy something by debit is limited to the funds they have in their account.
“At the most basic level, using a credit card is spending money that has to be paid back later, while using a debit card is spending your own money,” says Ashley F. Morgan, a credit and bankruptcy attorney.
What is a credit card?
A credit card is a payment card that uses a line of credit – instead of cash or checks – to make purchases. Consumers must first apply for and be approved for a credit card to use one. Any amount debited from the card must be refunded within a certain period of time and may include interest and applicable fees, depending on the card you have.
The credit card issuer will keep a log of what is charged to the card for each billing cycle and issue an invoice at the end of it. Interest is generally not charged on the first invoice on which it appears. So, if cardholders pay off their entire balance before the statement date, no interest will be charged to their account.
Paying on time each month also helps build a strong credit history and improve the borrower’s credit rating. Paying the balance in full will also keep credit usage low, which is another factor that will increase your credit score.
Credit cards offer more fraud and liability protection than a debit card. Since a debit card draws money directly from a bank account, it is difficult to stop fraudulent activity until the account card holder – or the bank in some cases – notice it. It can take weeks to recover stolen money from a checking account via debit transactions. The liability on a debit card is only $50 if you notify your bank within two days, but rises to $500 if you don’t.
A credit card, on the other hand, has $0 liability protection for fraudulent purchases, meaning you don’t owe money on purchases you didn’t make. You may even be notified that your card has been stolen before you know it. There are other reasons why using a credit card can work in your favor.
“If there’s any uncertainty about a transaction or if it’s a big ticket, I highly recommend using a credit card,” says credit attorney Ashley F. Morgan and bankruptcy. “With a credit card, if you need to dispute the transaction, it only affects the available credit. If you dispute a charge with the debit card, the funds in your account may be blocked or frozen until the end of the transaction. dispute.”
What is a debit card?
A debit card is a payment card linked to a checking or savings account. Unlike a credit card — which draws on a line of credit that you have to pay back — a debit card uses money you’ve already deposited into your account and nothing needs to be paid back.
Debit cards give you access to your money immediately. With a debit card, you don’t need to carry cash and you can use it in most stores. If you need access to cash, many stores will allow you to withdraw cash after entering your PIN at checkout.
When you use it in a store, the funds are deducted from your checking account and immediately transferred to the merchant’s account. You can only access funds available in your account.
Most of the time, using your debit card is free, but sometimes you may be charged a fee by the merchant or your bank.
A debit card is great for those new to managing their finances (like young adults) and those who want to stick to their budget.
A debit card offers less protection against fraudulent activity. Lawyer and scam and identity theft expert Steven Weisman said, “With a debit card, your liability protection is tied to how quickly you become aware of and report fraudulent use, which exposes you potentially having your entire bank account drained without recourse if you don’t report the problem promptly, which is why I recommend people only use debit cards as ATM cards.
Here is an overview of the pros and cons of using a debit card.