What Is a Debit Card and How Does It Differ from a Credit Card?

What Is a Debit Card?

A debit card is a payment card that is directly linked to your checking account. Basically, a debit card works like an electronic check, giving you direct and instant access to the money already in your account.

Features of a Debit Card

When you use your debit card, the amount of money for your purchase is deducted from your account balance. Since you are spending your own money, as opposed to borrowing money, you don’t have to worry about interest charges on your transactions or repaying the money at a later date.

If you need cash, you can use your debit card at an ATM to easily withdraw cash 24/7. You can also access ATMs with your debit card to conduct other banking transactions, such as checking your account balance, making deposits, and transferring funds between your accounts.

For security, you will usually be required to choose a PIN for your debit card. Many retail locations that accept debit payments (e.g., grocery stores, department stores, gas stations, etc.) and all ATMs require you to input your PIN to verify your identity.

When You Might Choose a Debit Card

If you’re trying not to overspend or get bogged down in consumer debt, using a debit card can help you stay within a budget. Since your spending limit is predetermined based on your existing funds, you will automatically need to be more mindful of your purchases.

Teenagers and young adults are also good candidates for debit cards. Since the amount they can spend is limited by how much is in their account, account holders must pay attention to their balance and spend within their means. For many parents, a debit card is a great tool for teaching fiscal responsibility.

What Is a Credit Card?

A credit card is a payment card that allows you to borrow money from a financial institution or company. Unlike debit cards, credit cards are separate from your banking accounts; instead, you can borrow money up to a certain credit limit, which is often greater than the amount in your checking account. You must then repay the money in full. If you don’t do so by a given due date, you will be charged interest on the balance.

Features of a Credit Card

Since you borrow money with a credit card, it usually comes with some fees. You may have to pay an annual fee just to use the card. Interest charges on unpaid balances and late payment fees may also be required. This can all add up and mean you must repay significantly more money than you originally borrowed, so make sure you review the terms of any credit card you take out.

Many credit cards come with incentives, such as rewards programs, cashback benefits, or travel savings. This is especially beneficial if you are using the card for a large purchase, like furniture or home improvements.

Credit card companies report activity to credit bureaus, so credit cards can be useful for building up your credit score. When you use a credit card in a responsible way (making regular payments and paying off your balance in a timely manner), you can improve your credit score. A good credit score is helpful when you are applying for a mortgage or other loans and want the best interest rates and terms.

Another feature of credit cards is that they generally offer strong fraud protection. In most cases, when you dispute charges on your credit card statement, you will have only limited liability, if any, for fraudulent or unauthorized charges and transactions. Using your credit card overseas is generally easy and safe as well.

When You Might Choose a Credit Card

If you need to make a large purchase or pay for services like auto or home repairs and do not have the funds to immediately cover the costs, paying with a credit card might be a good option. Just be sure to have a payment plan in mind to ensure you don’t end up paying extra interest and fees. Alternative options for large expenses might also be a home equity loan or personal loan. These typically come with lower interest rates than credit cards.

For people trying to build a credit history or earn travel points, opening a credit card account can be helpful. Again, it’s important to make regular payments on time and use your card responsibly to establish and maintain a good credit score.

Debit or Credit?

Whether a credit card, debit card, or both would best serve your needs is a very individual decision. Consider how you plan to use the card and what the benefits and risks of each might be. A little forethought and research can help you secure your financial future.