Debit Cards vs. Credit Cards – What’s the Difference?

John Ganotis

John Ganotis

Updated May 09, 2018

“I use my debit card for everything!”

If you use your debit card for everything you’re missing out.

Credit cards have several advantages over debit cards. Credit cards…

  • can help you build positive credit history, which is important for everything from renting an apartment to getting car insurance
  • offer better protection for your money if your card is lost or stolen
  • could earn you rewards or cash back on purchases you’re making anyway
  • often provide additional benefits, like extended warranties on electronics, just for using your card for a purchase
  • give you a “free” month-long loan when you pay your bill in full each month
  • provide more flexibility when booking a hotel or renting a car
  • don’t have to cost you a cent, even though you’re getting all these benefits
Want to learn how to use credit cards to your advantage? Read our guide to building credit with credit cards.

“But I always pick ‘credit’ instead of ‘debit’ when I swipe my debit card!”

If you’re given the option to pick “credit” or “debit” when you’re buying something with your debit card, this only determines how the transaction is processed. Usually, you’ll need to enter your PIN for a “debit” transaction, or sign if you choose “credit.”

Choosing “credit” does not make your debit card a credit card. It doesn’t provide a line of credit that establishes credit history, like a credit card does.

Choosing “credit” also does not give you the better consumer protections that credit cards provide.

Instead, selecting “credit” or “debit” just determines how the card is processed and may result in different fees for the merchant. For details about what happens when you select “credit” vs. “debit” at checkout, see this Reddit thread.

There’s one minor difference you may noticed when choosing “credit” over “debit” when you’re using a debit card: Since they go through the credit card network, transactions processed as “credit” may take a few days to clear. On the other hand, transactions processed as “debit” hit your checking account immediately. In some cases, if you don’t have enough money to cover the transaction in your checking account, a transaction could fail if you choose “debit,” but work if you select “credit” because of this difference in how long the transaction takes to clear.

Q&A Video: Should I Use a Credit Card or a Debit Card?

Advantages of Credit Cards over Debit Cards

Building Credit History and Credit Scores

One of the best ways to build healthy credit history on your credit reports is through the use of properly managed credit card accounts.

Credit scores are based on information on your credit reports. Most credit cards are reported to the major credit bureaus. So, if you use your credit cards responsibly month in and month out, then you can expect to see a positive impact to your credit scores. Debit cards simply do not offer the same benefit since their activity is not reported to the credit bureaus.

Remember, good credit history can save you money through better terms on auto loans and mortgages, and help you qualify for better credit cards in the future. Sometimes, you may not even be able to rent an apartment or get a cell phone plan on your own if you don’t have enough credit history established.

For young people looking to establish credit for the first time or for those who are looking to rebuild previously damaged credit reports, credit cards can be a powerful tool. If you are ready to begin building (or rebuilding) your credit then switching from using a debit card to credit cards can be a great first step in the right direction.

Losing Your Card and Fraud Liability

Would you be more concerned about losing your debit card or losing your credit card?

First, it’s important to think about where the money comes from when you (or a criminal) makes a purchase with your card.

When someone steals your credit card information and uses it fraudulently, that person is using your credit card issuer’s money.

When someone steals your debit card information and uses it fraudulently, he or she is spending the money in your checking account.

When you buy something with a credit card, you’re spending the credit card company’s money that you’ll pay back to them later. If someone uses your card without your permission, you have ample time to report the fraud and sort everything out before you get your credit card bill and pay the credit card company any money. With a debit card, however, the money leaves your account immediately, whether the charge is fraudulent or not. Depending on your bank, there may be a significant delay of days or weeks before you see that money from a fraudulent charge again, if ever.

Second, it’s important to consider how much you’re liable for when someone uses your card without your permission. The legal protections for fraud are different for credit cards and debit cards.

Credit card users are protected from fraud by the Fair Credit Billing Act (FCBA), which limits the consumer’s liability charge to $50. Even better, if you report your card as lost before it’s used, the FCBA says you’re not responsible for any unauthorized charges. Most credit card issuers actually take this a step further and limit cardholder liability for fraudulent changes to $0.

Debit card fraud protection is covered by the Electronic Funds Transfer Act (EFTA), which doesn’t always provide the same amount of protection. If you report a debit card lost before any unauthorized purchases are made, you won’t be liable. If you report within two business days of learning about the loss or theft, you’ll be liable for up to $50. If you wait more than 2 days, you’re liable for $500. And, if you wait more than 60 days from when your statement is sent to you you’re liable for the entire amount. That’s a lot more potential liability with debit cards!

Many Credit Cards Earn Rewards

Lots of credit cards have some form of rewards program. Why not earn some rewards on the money you’re spending each month?

If you’re new to credit cards, you might not be able to get a card that earns any rewards. However, as you build up your positive credit history you may be able to qualify for more rewarding cards.

Some cards have reward programs designed for earning cash back, where you’ll get a percentage of each purchase back as a statement credit. Usually the percentage is 1-5%, so it’s like getting a small discount on everything you buy.

Other credit cards earn points on purchases, which can be redeemed for things like flights and hotel stays. Most cards that earn points will also let you redeem points for statement credit, which is more or less using it as a cash back card.

Additionally, many credit cards come with a sign-up bonus. This could be a dollar amount (like a $200 statement credit) or extra points (like 50,000 bonus points). Usually, this sign-up bonus is triggered when you spend a certain amount of money in a limited time period after opening the card. For example, you may get 50,000 bonus points when you spend $5,000 on the card in the first 3 months.

You won’t get rich from credit card rewards, but they can be great icing on the cake when you’re already using a credit card for all the other beneficial reasons.

To learn more about cards that earn rewards, see our page about rewards credit cards and travel credit cards.

Extra Credit Card Benefits

Credit cards typically come with benefits, which are extra features that may:

  • provide protections on purchases, like extended warranties on electronics
  • offer insurance or special access while traveling, like collision insurance on rental cars or airport lounge access
  • make your life easier, like concierge services to help you buy tickets or book reservations at restaurants

Credit cards companies don’t advertise these benefits as much as they do their rewards programs, but they can still be extremely valuable. And, you usually don’t have to change your behavior to take advantage of these benefits. For example, if you buy a TV on your credit card you may automatically get an extra year added onto the warranty by your credit card company.

To learn more about the benefits available with credit cards, read our Guide to Credit Card Benefits.

“Free” Short-Term Financing If You Pay Your Bill Every Month

When you use a debit card, the balance of the purchase is finalized and deducted from your checking account within a few days.

When you use a credit card, you won’t have to pay until your billing cycle finishes and the statement balance is due. This is called a grace period. With most credit cards, as long as you pay your statement balance by the due date, you can avoid interest completely.

When you pay off your statement balance completely on your due date, you’re basically getting an interest-free loan for that month (or more) of delay between the time you make a purchase and when the bill is due.

To learn more about credit card billing cycles and avoiding credit card interest, read this: How much should I pay on my credit card bill? And when should I pay it?

More Convenient for Traveling

When you’re on the road, whether it’s for business or pleasure, using a debit card becomes problematic.

This is because of the “hold” placed on funds by hotels, gas stations, and rental car companies. A hold is when the merchant temporarily claims an amount of money in your account until the end of your stay or until the final cost of the transaction becomes clear.

For example, if you’re planning on staying at a hotel for 5 days and the bill is going to be $2,000 the hotel will hold that entire amount plus some extra for incidental charges. They’ll do this when you check in, not when you check out. The same thing happens when renting a car.

If you want to use a debit card for one of these holds you’ll essentially have to deposit all the money into your checking account up front and not use it until the transaction is finalized. Many hotels and rental car companies will not even accept debit cards for these types of holds, even if they’ll accept it for the final payment of the amount owed.

Advantages of Debit Cards over Credit Cards

The only real benefit of a debit card over a credit card is that the money leaves your account immediately, so it’s harder to spend more money than you actually have in your bank account.

You may have heard people demonize credit cards. They may urge you to avoid credit cards completely and stick to only using cash or a debit card.

The truth is that poor credit card management, such as revolving a balance or making late payments, is what should be avoided. Properly managed credit cards can be a smart financial decision regardless of what some financial “gurus” tells you.

Some people, however, can’t handle the responsibility of a credit card. They spend more than they can afford to pay back when their credit card bills are due. Then, they’re stuck paying interest and accumulating higher and higher balances. They may only be able to afford their minimums due each month. Even worse, they may not be able to make minimum payments and end up with late payments or worse, damaging their credit histories for years to come.

If you don’t have the discipline to only spend what you can afford to pay off completely, you may want to stick with a debit card. Otherwise, a credit card is likely the smarter decision.

Getting Started with Credit Cards

New to credit cards? One of the best places to start is our guide to building credit with credit cards. There, you’ll learn about the factors that go into credit scores and how you can use credit cards to your advantage while avoiding fees.

Want to find a credit card now? To start your search, head over to our main credit cards page.

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