What's the difference between a credit card and a debit card?
Credit cards and debit cards are used daily by millions of people, but we rarely consider how a credit card is different from a debit card. When it comes to credit card vs. debit card differences, the main difference is that all purchases made with a credit card are charged to a person's credit card account. All purchases and withdrawals made with a debit card immediately deduct the funds from the checking account the card is connected to.
Read on to learn more about using a credit card vs. debit card.
At Credit Union of Southern California (CU SoCal), we make getting credit card and debit card easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
Get Started on Your Credit Card Today!
How debit cards work
Debit cards are typically offered by financial institutions when someone opens a new checking account at a credit union, bank, or online bank. The debit card is linked to your new account and provides access to the money in your account.
Debit cards can be used to make in-store purchases, online purchases, and withdraw money from your account at an ATM or using the PIN pad at a retail register.
Before using your debit card to make a purchase or withdraw money, it’s important to make sure you have enough money in your account to cover the entire amount of your intended purchase or withdrawal. If you do not have sufficient funds in your checking account, the charge may be declined, and your financial institution may charge you an “insufficient funds fee.” Some financial institutions will cover the amount needed for the purchase or withdrawal and charge you later, which makes your account “overdrawn.”
Overdrawn accounts are often charged overdraft fees which will appear on your monthly debit card statement. Depending on how your checking account is set up you may have “overdraft protection.” For example, CU SoCal
overdraft protection will transfer funds from your savings, money market, or line of credit when you don't have money available in your checking account to cover a check or debit transaction
Types of debit cards
There are several types of debit cards, and each serves a different purpose:
Standard debit cards. A debit card can be used in the same way you'd use a credit card to make in-store or online purchases; however, the money comes out of your checking account immediately or within several hours of the transaction.
Prepaid debit cards. A prepaid debit card contains only the amount of money you paid for it (less any fees) and cannot be used at an ATM. Prepaid cards are offered by the major credit card companies and can be purchased at supermarkets, drug stores, and other retailers.
Electronic benefits transfer (EBT) cards. These cards are issued by state and federal agencies and are part of an electronic system that allows a benefits recipient to authorize transfer of their government benefits to a retailer to pay for products. EBT is currently being used in many states to issue food stamp funds and other food assistance programs.
Advantages of debit cards
Avoid debt. Credit cards come with a credit limit that gives consumers access to thousands of dollars. People who aren't careful with their spending may find they accumulated more debt than they can repay. This leads to a debt burden. Use of debit cards doesn't result in debt because spending is limited to the amount of money you have in your checking account. For this reason, people tend to not over-spend on purchases using their debit card.
No annual fees. Many credit cards have an annual fee. Financial institutions do not charge fees for issuing debit cards.
No interest on purchases. Debit card purchases withdraw the money directly from your checking account, and no interest is charged on the transaction.
Disadvantages of debit cards
Doesn't build credit. it is not possible to
build credit with a debit card. This is because transactions made with a debit card draw the money from your own account, instead of a line of credit from a financial institution or lender.
Conditional rewards
Some credit unions and banks offer rewards for using your debit card, but only if you agree to sign-up for a
rewards checking account, which may come with a monthly fee and other requirements that must be met in order to earn rewards points or cash back.
Considering these unique debit card features, you can start to see some of the primary credit card and debit card differences.
How credit cards work
Credit cards provide access to a line of credit extended to you by a credit union, bank or other lender. Credit cards can be used to make purchases and withdraw cash (in the form of a cash advance). When you use a credit card, the amount of the transaction is automatically added to your account balance. All credit cards come with a credit limit, and your transaction will automatically be declined if you attempt to make a purchase beyond the credit limit you've been given.
Purchases amounts made with the card are charged an Annual Percentage Rate (APR) on all charges that are carried month-to-month. If you pay your bill in full each month on the bill due date you won't be charged interest. The APR a lender charges each consumer may vary depending on a person's credit score, which is why it’s so important to have a
good credit score!
If used properly,
credit cards can be a powerful tool for building credit.
Types of credit cards
Several different types of credit cards are available to consumers:
Standard credit cards. These cards are considered "revolving" credit as the balance owed is repaid and the amount you can use is replenished. Standard credit cards do not provide rewards. The balance that accrues does not need to be paid in full every month and interest will be charged on any unpaid balance that's carried over to the next statement.
Rewards credit cards. Reward credit cards provide rewards (such as cash-back or points) for using the card. Many people like rewards cards so they can earn travel points and cash back on high-cost purchases.
Balance transfer credit cards. Most credit card companies offer a promotional 0% APR (annual percentage rate) on balance transfers. The promotional interest rate lasts for a fixed period, usually 12 months, after which the rate increases significantly. Transferring your high-interest debt to one of these cards lets you pay off your debt interest free.
Secured credit cards. People with no credit history or bad credit who get declined for standard credit cards may qualify for a secured credit card. As the name suggests, these cards are secured by the amount you deposit to get the card and this amount becomes your credit limit. For example, if you get a $500 secured credit card you can spend up to $500. As you make monthly payments the credit is replenished, and your payments are reported to the credit reporting agencies. If you make on-time payments you will
build credit.
Charge cards. A charge card sounds similar to a credit card, but it's quite different. Charge cards require that all charges be repaid in full each month. Therefore, no interest is charged and there is no minimum payment due. Charges made become a debt to the creditor which must be repaid, or fees will be charged, and the account may be closed by the bank.
Advantages of credit cards
Build credit history. Young adults who get their first credit card can begin to build credit by responsibly making purchases and repaying their bill in full each month. Paying your credit card bill on time is essential to having a good credit score.
Purchase protection. Most credit cards offer protection on purchases made with the card. This may include types of extended warranties on electronics, for example, or a credit to your account if the merchandise you purchased was faulty.
Fraud protection. Fraud occurs when an unauthorized person gets access to your card number or PIN and makes unauthorized purchases or withdrawals from your account. Credit card fraud protection may include fraud alert notifications if there is unusual activity on your account, helping you get your money back if your account is hacked, and you may not have to pay the charges made without your consent.
Extra time to pay for purchases. Making purchases with cash or a debit card means spending your money right away. Credit cards give you a 30-day pay period to pay in full or the option to make a minimum payment and carry a balance to the next statement.
Disadvantages of credit cards
Overspending. Because credit cards are so easy to use it's also easy to overspend.
Impact to credit score. Failure to make on-time bill payments or meet the minimum payment requirement will be reported to the credit bureaus and result in dings to your credit score.
Interest and fees. Credit card spending can lead to high debt that costs more than your original purchase if you do not pay the balance in full each month. Late fees and other penalty fees are charged for late or missed payments.
Which is better a debit or credit card?
As you can see, credit cards and debit cards can each be used to make purchases and get cash; however, there are distinct differences in where the money comes from and how use of each card can affect your credit history and credit score. Both credit cards and debit cards are handy to have and can help you meet your banking needs.
Why would I use a debit card instead of a credit card?
Debit cards are ideal for getting cash quickly from an ATM or as cash-back when making a retail purchase in the supermarket, for example. If you don't want to create debt, then making purchases and withdrawing cash from your checking account using your debit card is a good idea.
Can a debit card be used as a credit card?
Debit cards can be used to make the same purchases you'd make with a credit card; however, it doesn't mean that your
debit card is being used as a credit card.
Do all credit cards charge interest?
Generally, yes, even when the credit card starts out with a zero percent promotional interest rate. For example, many credit cards offer a promotional zero % APR (annual percentage rate) for a fixed period, usually 12 months. At the end of the 12 months a new higher
credit card interest rate will take effect.
Can anyone get a credit card?
Whether you're just starting to build credit or if you have an established credit history and a good credit score, you are well-positioned to get approved for a credit card. If you have bad credit, it may be difficult to get approved.
Are credit cards safer than debit cards?
Credit cards are safer to some degree simply because they are not linked directly to your checking account. While a stolen credit card could result in purchases made by the thief, a stolen debit card could result in your checking account being emptied if the thief also has your PIN number. Never keep your PIN in your wallet with your debit card.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Credit Card Today!