The main difference between debit cards and credit cards is that debit cards are linked to a checking account and funds are pulled out immediately after a purchase, while credit cards are linked to a line of credit and purchases are paid off at a later date. A credit card is also far more likely to offer rewards. In fact, the best rewards credit cards can offer up to $1,204 more than the worst rewards cards over the first two years.
Credit cards are better than debit cards for people who use them responsibly because credit cards can help you save money, finance big-ticket purchases and build credit. Credit cards provide more fraud protection, too.
Both credit cards and debit cards deserve a place in most people’s wallets, though. Below, you can learn more about how credit cards and debit cards compare, as well as when to use each.
|Feature||Debit Card||Credit Card||Winner|
|Source of Funds||Checking account||Credit line.||Credit Cards|
|Debt Potential||Zero, if you don’t opt-in for overdraft protection||Credit limit represents 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||Anywhere VISA, MasterCard, American Express or Discover is accepted||Credit Cards|
|Credit Building||DOES NOT impact your credit standing||Impacts your credit standing, with monthly reporting to credit bureaus||Credit Cards|
|Average Annual Fee||$26.88||$22||Credit Cards|
|Interest||Earned on deposits||Owed if you don’t pay your balance in full||Debit Cards|
|ATM Access||Yes, often free when using in-network ATMs||Yes, costly cash advances||Debit Cards|
|Credit Line||No,||Yes, with unsecured credit cards (up to $100K+)||Credit Cards|
|Grace Period||Not applicable||At least 21 days between the end of a billing period and the due date||Credit Cards|
|Overdraft/Overlimit||Must opt-in to overdraw debit card||Must opt-in (not recommended)||Tie|
|Fraud Liability||$0 liability on signature transactions
$0 liability on some PIN transactions
|$0 liability on all unauthorized transactions||Credit Cards|
|Secondary Benefits||Excellent exchange rates, but credit cards also provide that and more||Rental car insurance, travel protection, extended product warranties, and more||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.
|Credit Cards Only||Debit Cards Only|
|Financing Purchases||ATM Withdrawals|
|Balance Transfers||Cash Back at the Register|
|Earning Rewards on Purchases||Small Dollar Transactions|
Note: Some debit cards provide rewards, and it’s possible to use credit cards for small transactions and ATM withdrawals, but they may not be the best payment method for the task.
Financing Purchases & Balance Transfers:
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.
Similarly, 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.
Earning Rewards on Purchases:
A credit card is far more likely to offer rewards than a debit card, and a credit card’s rewards are likely to be much more valuable.
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 equivalent to subsidizing the purchases of those who opt for that feature. Credit card processing fees and rewards program costs are baked into merchant pricing, so we all share in credit’s financial burden whether we enjoy the associated benefits or not.
ATM Withdrawals & Cash Back at the Register:
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.
You can also effectively turn a merchant’s cash register into an ATM by opting to receive cash back when paying for a purchase with a debit card at certain retailers. This is not possible with a credit card.
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.
To learn more, check out our guide to choosing between debit and credit at the register.
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.
- Low Interchange Fees on Debit Cards: 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.
- Signature Transactions Get More Protection Than PIN 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.
- Issuers Earn Big on Interchange Fees: Despite regulations limiting these fees, card issuers still pull in $20 billion in annual interchange fees.
- Chip and Signature Still Popular in U.S.: 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 Widely Accepts Cards: Debit cards and credit cards can both be added to Apple Pay and Google Wallet.
- Debits Cards Still Popular for Small Purchases: Debit cards are used almost twice as often as credit cards, but the value of credit card payments exceeds the value of debit card payments by almost 30 percent.
- Consumers Spend Trillions per Year: Combined spending on U.S. credit cards and debit cards totaled $8.5 trillion in 2021.
- More Alternatives to Traditional Cards: 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.