Debit cards and credit cards are two of the most commonly-used financial products at our disposal. But, despite sharing a number of similarities, these two forms of monetary plastic are quite different and should thus serve distinct roles within your financial arsenal.
In order to help you fully grasp these inherent distinctions, we’ve compiled a complete breakdown of how these titans of everyday money management stack up against one another. The short answer, however, is that credit cards are the preferable option for people who can use them responsibly due to credit’s supremacy in terms of credit building, rewards earning, financing capabilities and fraud protections.
| Feature | Debit Card | Credit Card | Winner |
|---|---|---|---|
| Source of Funds | Your checking account. | Your credit line. | Credit Cards |
| Debt Potential | Zero, assuming you do not opt-in for overdraft protection. You can only spend funds you have deposited. | With a secured card, none. With an unsecured card, your credit line represents your debt ceiling. | Debit Cards |
| Requires Account Approval? | Yes, based on banking history and/or relationship with institution. | Yes, based on credit standing and disposable income. | Debit Cards |
| Acceptability | Anywhere VISA or MasterCard is accepted. (45 million U.S. locations) | Anywhere VISA, MasterCard, American Express or Discover is accepted. (50+ million U.S. locations) Certain merchants do not accept credit card payments for purchases under $10. | Credit Cards |
| Credit Building | DOES NOT impact your credit standing. | A hard inquiry is made when you apply and the card issuer reports monthly account information to credit bureaus. | Credit Cards |
| Annual Fee | While free options are available, the average checking account-debit card combo sports a $6.10 monthly fee. | While free options are available, the average credit card has a $12.30 annual fee. | Credit Cards (can’t beat free credit building) |
| Interest Charges | None | Yes, if you don’t pay your balance in full. | Debit Cards |
| Rewards | Rarely | Yes The best cards from each issuer offer an average of $590 in rewards per year. | Credit Cards |
| ATM Access | Yes, often free | Yes, costly cash advances | Debit Cards |
| Credit Line | Yes, with overdraft protection | Yes, with unsecured credit cards (up to $50K) | Credit Cards |
| Grace Period | None | As long as you pay your bill in full every month, you’ll have up to 21 days each month to make a payment without incurring interest charges. | Credit Cards |
| Overdraft/Overlimit | Must opt-in to overdraw debit card (not recommended, although overdraft protection for checks is recommended) | Must opt-in (not recommended) | Tie |
| Fraud Liability | $0 liability on signature transactions PIN transactions may expose you to added liability, depending on when fraud gets reported. | $0 liability on all transactions | Credit Cards |
| Secondary Benefits | Debit cards do offer certain perks, including excellent exchange rates, but little that credit cards do not also provide. | Credit cards offer a host of secondary benefits, from rental car insurance and travel protection to extended product warranties. | Credit Cards |
| Overall Winner: Credit Cards | |||
Debit Card or Credit Card? When to Use Each
Credit cards and debit cards both enable you to make purchases online, over the phone, or in person at the point of sale, but there are also certain things that you can only do with one type of card or the other.
For a more complete look at a consumer’s choice between plastics, check out our Guide to Choosing Between Debit & Credit at the Register.
| Credit Cards Only | Debit Cards Only |
|---|---|
| Financing Purchases: A debit card’s very nature prevents you from using it for financing purposes. Credit card users, on the other hand, are only required to make a monthly minimum payment – usually around 3% of their balance each month. You can therefore use a credit card to make a big-ticket purchase or to cover an emergency expense while actually paying off the majority of the cost at a later date. | ATM Withdrawals: One of a debit card’s main draws is the ability to access cash from ATMs as needed. Not only does this lighten up your wallet, but it also makes you less of a target for pickpockets and other criminals. While you can use your credit card at an ATM, in what’s known as a cash advance, we consider cash withdrawals to be a debit-only transaction due to the prohibitive cost of credit card cash advances. |
| Balance Transfers: You can move various types of debt – including that originating from other credit cards, auto loans, HELOCs, mortgages and student loans – to a credit card in order to pay off your balance over time with a lower interest rate than you’re currently being charged. | Cash Back: You can also effectively turn a merchant’s cash register into an ATM by opting to receive cash back when paying for a purchase at certain retailers. This is an efficient way to kill two birds with one stone. |
| Small Dollar Transactions: Neighborhood merchants often will not accept credit cards for purchases under a certain amount – typically $10 – due to processing costs skewing the value proposition. |
It’s also important to note that when it comes to everyday purchases for which either a credit card or a debit card can be used, sacrificing the rewards of the former is tantamount to subsidizing the purchases of those who opt for that feature.
Credit card processing fees and rewards program costs are baked into merchant pricing, you see. And since shop owners don’t charge more for plastic transactions, we all ultimately share in credit’s financial burden without enjoying the associated benefits.
Debit Card & Credit Card Trends & Tips
The payments landscape is constantly changing, influenced by regulation, criminal schemes and consumer preference. Periodically taking stock of the landscape is therefore quite enlightening and potentially profitable.
- Interchange Fees: The Durbin Amendment limited the so-called “swipe” fees that banks can charge merchants for debit card purchases, thus costing big banks an estimated $8.4 billion in annual revenue, necessitating changes in the fee structure of checking accounts and essentially killing debit card rewards.Interestingly enough, such dynamics have also led banks to promote signature debit card purchases with more favorable fraud liability protections, as they provide more profitable interchange fees than the otherwise more secure PIN transactions.
- Sign For Debit Card Transactions: Card networks offer blanket $0 liability guarantees for unauthorized transactions “verified” by signature, while providing far spottier coverage for PIN transactions. One reason for this is that signature debit card transactions carry higher interchange fees than PIN transactions and are thus more profitable for credit card companies.
- Interchange Earnings: Despite regulations limiting these fees, card issuers still pull in $20 billion in annual interchange fees.
- Chip and Signature: Most “smart” credit and debit cards now being issued use chip-and-signature verification rather than the more secure chip-and-PIN, as the former provides for an easier transition from our current magnetic-stripe-based payments system.
- Apple Pay & Google Wallet: Will pass through purchases to both credit cards and debit cards.
- Market Share: Debit card transactions account for 41% of the debit-credit payments market.
- $4 Trillion: Combined annual spending on U.S. credit cards and debit cards.
- Alternatives: Credit cards and debit cards both have what amount to cousins – products that offer similar utility with slight differences. Store cards and gas cards play this role as it relates to credit cards, and prepaid cards offer a viable alternative to the traditional combination of a bank account and debit card.
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