Credit cards and debit cards look almost exactly alike, and you can swipe both at store checkouts and ATMs. But they’re actually quite different. Money you spend or withdraw using a debit card comes straight out of your bank account — you’re spending your own funds. But when you charge a purchase or take a cash advance using a credit card, you incur debt that you’ll have to repay, often with interest.
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Understanding how debit and credit work is the key to taking control of your finances. This guide takes a closer look at debit and credit cards and offers tips for using both to your advantage.
What Is a Debit Card?
Checking accounts you open at a bank or credit union automatically come with a debit card in most cases. The debit card is linked to your account and works like a check, in that you withdraw money from your own bank account when you use the card to pay for a purchase or withdraw cash.
Unlike using a check, however, you don’t have to wait days or weeks for the transaction to clear — the money is withdrawn from your account right away. So, you must limit your debit card spending and withdrawals to the amount of money you have in your account. Otherwise, you’re likely to be hit with a fee for overdrawing your account — the digital equivalent of bouncing a check.
Your bank might offer a debit card rewards program as an incentive for customers to use their cards. Discover, for example, gives 1% cash back on up to $3,000 in purchases each month.
You’ll know your card is a debit card if it has the word “debit” somewhere on the front. You’ll also see a logo for Visa, Mastercard or another payment processing network.
Good To Know
Prepaid debit cards are a type of debit card that isn’t linked to your checking account. Instead, you load it with cash — just as you would a gift card — and spend down that cash whenever you use the card. Because you can only spend as much as you have left on the card, there’s no chance of an overdraft.
What Is a Credit Card?
A credit card is linked to a revolving line of credit with a borrowing limit set by the bank that issues the card. You must apply and be approved for the card. Once you are, you can use the card to make purchases and cash withdrawals up to the amount of your credit limit, and you pay off the debt over time. But unless you repay the entire balance each month, you’ll find yourself paying interest on the outstanding amount.
Some cards have rewards programs that pay you cash back, travel miles or other bonuses for using your card.
You’ll know your card is a credit card if you see the logo of a payment-processing network, such as Visa, on the front and the word “debit” does not appear on the card.
Is Debit Better Than Credit?
Whether debit is a better choice than credit depends on your financial situation and how you manage your money. Each one has unique benefits:
Debit is better for:
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Eliminating the need to carry cash
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Instant access to money in your bank account
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Taking advantage of debit card rewards without accumulating debt
Credit is better for:
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Earning higher-value rewards
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Building a credit history that can help you qualify for an auto or home loan
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Avoiding liability for fraudulent purchases made with your lost or stolen card
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Protecting purchases with extended warranties and reimbursement for damaged or stolen items
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Hotel and rental car reservations
How Can I Use a Debit Card and Credit Card?
Your debit card is a good alternative to cash for everyday purchases you want to pay for directly from your checking account. This way, you get the convenience of using plastic, but because the money is immediately debited, you’ll be less tempted to overspend. And you’ll avoid accumulating debt entirely.
You should use your credit card to make or save money or help build credit, but only when the benefits of using the card outweigh the risks of running up debt. For example, it might work in your favor to charge normal purchases, and even bill payments, if you stand to earn rewards on your spending. And the purchase and price guarantees credit cards offer can protect your investment in big-ticket items and ensure that you get the best price possible, plus protection against fraudulent use of your account.
Overall, however, the value of these benefits evaporates if you spend more on interest payments than you stand to gain. So, consider reserving using your card for purchases you can pay off by your first due date to avoid interest charges.
Debit Card and Credit Card Fees
Although there are fees associated with both debit cards and credit cards, credit cards are usually more expensive to use.
Banks generally give debit cards for free, and because you use one to spend money already in your account, there’s no interest on the amount you spend. But your bank might charge you for using your card at an ATM, especially one outside of its ATM network. Other possible charges include overdraft fees for spending or withdrawing more than you have in your account, and foreign transaction fees when you use your card overseas.
Some credit cards charge you an annual fee just to have the card. This is generally true of cards with generous perks like cash back and travel rewards. But even if your credit card has no annual fee, you’ll still have to pay interest on cash advances and on balances, you don’t pay before the billing period ends.
How much interest you pay depends on the terms of your agreement with the credit card issuer. Some cards charge a fixed annual percentage rate. Others charge a variable APR tied to the prime rate, such as the prime rate plus 5%. And credit card issuers often charge different percentage rates for different activities — a cash advance could have a higher rate than a purchase, for example.
Credit card companies also charge fees for late payments and, in some cases, for using the card overseas.
Debit Card vs. Credit Card: Which Is Safer To Use?
One area where credit has a clear advantage over debit is security. All four major credit card networks — Visa, Mastercard, Discover and American Express — offer full liability protection for unauthorized charges. You’re not responsible for any portion of the unauthorized amount.
Although debit card issuers might offer the same protection, they’re not required to. In fact, you’re only guaranteed to be off the hook for unauthorized purchases if you report your card lost or stolen before the thief uses it. Waiting just two days to report the loss can cost you up to $50, and waiting three or more makes you responsible up to $500. You have no protection on losses not reported within 60 days.
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This article originally appeared on GOBankingRates.com: Debit Card vs. Credit Card: What’s the Difference?
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