Now, as it was in the late 1980s, it is customary to get a debit card when you open your checking account. Similarly, when I was a college student in the 1980s, it was easy for students to get a credit card. I don’t know if I grasped the significant differences between credit cards vs. debit cards back then. My only worry about my debit card was if it would get eaten by the ATM if I forgot my pin!
In the 1980s, credit card companies would set up tables around the campus center and give out swag for sign-ups. I had part-time employment and a bank account that only contained my tuition money, but somehow, I ended up qualifying for a credit card. I don’t remember what the gift was or what my initial credit limit was. I’m sure it was on the lower end. Although I didn’t abuse it, it certainly was a learning experience! I did graduate college with credit card debt but fortunately paid it off quickly.
In the thirty years since I was in college, access to credit cards for college students has changed due to the tightening of regulations. It’s a joke in our house about how one credit card company kept sending my college-age son credit card applications in the mail but denied him when he applied. He ended up applying for a credit card from a local bank where he has his checking account, intending to use it to build his credit history.
However, in comparing credit cards vs. debit cards, which is better? The answer depends on your needs, spending habits, self control, and goals.
Credit Cards vs. Debit Cards
They were the most popular ways to pay for purchases in 2021, accounting for 70% of all point-of-sale purchases, according to Statista.com. Credit cards kept the lead with 40% of retail purchases, with debit cards used for 30% of transactions. Credit cards and debit cards may look identical in your wallet, but there are significant differences between the two.
Credit cards and debit cards have 16-digit card numbers, expiration dates, magnetic strips, and EMV smart chips to help make them a secure payment method. A bank or credit union will issue them in your name or business name, printed on the card.
Debit Cards You Fund
Debit cards are funded by the money you have deposited at your financial institution. When you use your debit card, it withdraws the funds from your account. If you try to spend more than you have deposited, expect to be declined or have to pay overdraft fees.
Credit Cards You Borrow
When using a credit card, you borrow money from the card issuer. Borrowing limits are set when you apply for a card, which may increase as time passes. Money borrowed is paid back monthly, either in full or a part. It is a revolving loan account. If you don’t pay back the amount spent in full each month, you will owe interest on the unpaid balance. Miss a payment or pay late, and you will have to pay interest and additional fees. Missing and late payments will lower your credit score.
Other Types of Cards
Secured Credit Cards
Secured credit cards are in between credit and debit cards. They require an initial deposit to open the account. The financial institution holds the funds as collateral against purchases. Your deposit amount is your card credit limit. This limit will not increase unless you deposit more money in your account. Secured credit cards are an excellent option for someone unable to get a traditional credit card due to a lack of credit history or bad credit. A secured credit card can help you build your credit, unlike a debit card.
Prepaid Debit Cards
Prepaid debit cards are debit cards that the purchaser puts money on, backed by MasterCard, Visa, or American Express. Bank gift cards are an example. They are frequently found in retail locations. Although they do not charge a fee when you load the card, they often have monthly fees when used if the card has a balance. They offer the convenience of a regular debit card but are not linked to a personal bank account.
Electronic Benefits Transfer Cards
Electronic benefits transfer (EBT) cards are debit cards issued by the state or the federal government. For example, the Supplemental Nutrition Assistance Program (SNAP) uses these reloadable cards. Coronavirus Relief Funds were also loaded on EBT cards in the past few years.
Charge cards are card accounts that require consumers to pay their balance in full every month. They typically do not charge interest and have no preset spending limits. Expect substantial late fees if the balance is not paid in full each month. Charge cards usually have an annual fee and offer significant card rewards. Some brands of charge cards are American Express and Capital One Spark.
In general, credit cards offer better fraud protection vs. debit cards. The government established consumer credit card fraud protection under the Fair Credit Billing Act. If credit card fraud is reported quickly, the customer is only responsible for a maximum of $50. Often the credit card company will refund the entire fraudulent purchase. The key is for consumers to watch their accounts and report problems promptly. If the customer waits too long to report the fraud, they may be liable. While fraud is investigated on a credit card, the consumer does not have to pay the reported transaction. If a credit card holder disputes a charge, it is usually removed immediately. If the transaction is eventually settled in the seller’s favor, it would be restored or rebilled.
Electronic Fund Transfer Act
The Electronic Fund Transfer Act gives debit card holders similar protection from theft or loss as credit cards—but only if the customer reports it within 48 hours of discovery. When a bank is notified during the first 48 hours, the consumer is liable for a maximum of $50. After 48 hours, the card user’s liability rises to $500; after 60 days, there is no limit. If a person fails to notify the financial institution after 60 days, there is no limit to the liability of fraudulent charges. These rules apply to ATM transactions, online bill payments, and automatic payments. Victims of debit card theft and fraud are without their funds until the investigation is complete. If debit card holders contest a transaction they made, it is often up to the merchant’s discretion if the transaction is reversed or not.
Since debit cards are linked to your bank account, fraud or theft could give access to your bank accounts and all the money they contain. If you have your checking account linked to your savings account due to overdraft protection, criminals could access that too. Fraud protection levels depend on whether your card is lost, stolen, or still in your possession.
Building Credit Score
Credit cards have an advantage vs. debit cards in building a credit score. Careful use of credit cards can help you build your credit history and increase your credit score with the three credit reporting agencies: Equifax, Experian, and TransUnion. Credit card companies report your payments and spending to these agencies every month. Your credit reports show responsible use of on-time payments and your credit utilization ratio, also known as your debt-to-credit ratio. Credit reports also reflect negative activity such as late or non-payments. Misusing credit cards can lower your credit score. If you miss payments, pay late, or use the maximum card amount, it can negatively affect your credit.
Using just a debit card will not help you establish your credit history since it uses the money you already have. You haven’t demonstrated that you can responsibly repay what is borrowed.
Consumers are eligible for a free annual report from the three credit reporting agencies. Click here for five reasons you should review your credit reports.
Differences Between Credit Cards vs. Debit Cards
Insurance and Warranties
Credit cards may offer additional insurance or warranties on purchased items beyond what a manufacturer or retail outlet provides. Benefits may even include if an item is damaged or stolen. Some credit cards offer price protection that refunds price differences on purchases. Many credit cards offer additional insurance when renting a car. In fact, if you attempt to rent a car with a debit card and not a credit card, you may have to put down a deposit.
Consumers with strong credit scores can qualify for rewards credit cards that offer benefits such as cash back, airline miles, and points to redeem for gift cards or other items. Most reward credit cards do charge an annual fee. Debit cards do not have reward programs.
Credit cards, especially reward cards, may have annual fees. Debit cards do not. You may have to pay monthly maintenance, overdraft, or ATM fees if you use an ATM that is not part of your bank network. Credit cards also charge interest if you do not pay your balance in full each month. Some cards offer promotional 0% interest rates, especially on balance transfers, but the interest rate returns to normal after the specified period.
Debit cards make it easier to access your cash, usually at no extra charge if you use your bank’s ATM. Cash advances with a credit card typically have a hefty fee and start accruing interest immediately instead of when the balance is due.
First Citizens Bank is an over 100-year-old family-controlled bank with a community focus. The bank’s emphasis is its customers and building lasting relationships.
- No monthly fees
- No minimum balance
- Low opening balance
- Free digital and mobile banking
- Access your account digitally, at branches, or at ATMs
- Link checking and savings accounts for overdraft protection
Which is Right for You
In my household, we rarely use our debit cards other than at the ATM and instead use our credit cards to earn rewards like airline miles and points. If we can’t pay for it within 30 days, we don’t buy it. The credit cards give us grace periods between when the item is purchased, the statement is closed, and the payment is due. It helps us with our budgeting. The key is paying off our balances every month. We do not carry a balance because the interest rate would negate the perks of the rewards. This is what works for our family.
In the choice between credit cards vs debit cards, determining which one is best depends on your financial situation and habits. Need to pay down your credit card and stick to a budget? A debit card is your best bet since you can only spend what you have in your account. If you are trying to establish or improve your credit score, a credit card will help you reach that goal by making purchases and paying them off. Your goals will help you determine which is right for you.
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Christine Seaver is a freelance writer that writes about personal finance, budgeting, and debt. She is a frequent contributor at Dividendpower.org. Christine works as an office manager by day and a cookie baker at night. She lives in Massachusetts with her family.