You are now leaving our website and entering a third-party website over which we have no control.
Credit vs. Debit Card: Main Differences and What to Know
When you aren't using cash to pay for something, you might ask yourself whether it's better to use a credit card or debit card?
Either one can get the job done when you are shopping and paying bills, but did you know that these two types of cards are very different when it comes to your budgeting, financial planning, fraud protection, and other key factors?
Let's take a look at the differences between these cards and how you can try to put them to the best use.
What is a credit card?
A credit card account is a type of revolving credit issued by banks and other financial institutions. The cardholder can borrow money up to a certain credit limit to conduct financial transactions. Credit cards can be used to buy things, obtain cash advances, make balance transfers, and perform other functions. They can be used online, in person, by telephone, and through mobile payment platforms.
When the cardholder uses the card, the bank or financial institution (issuer) pays the merchant on behalf of the cardholder. The account holder then repays the issuer based on the terms of the credit card agreement.
If the balance is not paid in full by the due date, interest charges may be applied to any outstanding balance depending on the card issuer's agreement with the cardholder. Monthly statements inform cardholders of the total owed and the minimum monthly payment. Cardholders are able to make payments in different ways including checks, autopay, online payments, and pay-by-phone. Minimum payments are required each month, and any unpaid balance carries over to the next billing cycle, potentially accruing interest.
What is a debit card?
A debit card provides ways for consumers to use their checking accounts to pay for purchases and make deposits. It eliminates the need to carry cash or physical checks and is typically issued by a bank. When you buy something with a debit card, the money is withdrawn from your account.
With credit cards, the credit limit is set based on a number of different factors and can change over time. With debit cards, you should only withdraw the amount of money in your account. If you withdraw more, or overdraw your account, you may be subject to certain overdraft fees outlined by your bank. In some cases, your debit card might also have a withdrawal limit, set by your bank or card issuer, that would restrict how much money you can withdraw from your account at one time.
Debit cards also can give you ATM access so you can withdraw cash or check your balance at ATMs. Many retailers will allow you to withdraw small amounts of cash during a transaction using a debit card. You may also be able to use your debit card to deposit cash or checks at an ATM when it's convenient. However, some banks might require that you be a customer of the bank to do so.
When you use a debit card, funds are often drawn from your checking account or another linked account that same day. When you use a credit card, you’re borrowing money from the credit card issuer and adding to a balance that you can pay off each month or carry while paying interest. Those aren't the only important differences, however.
Credit card vs. debit card: The key differences
Let's look at some of the main differences between a credit card and a debit card.
Credit cards |
Debit cards |
|
|---|---|---|
|
Spending limits
|
The issuer sets your spending limit
|
You should only spend the amount in your account or risk incurring overdraft fees outlined by your card issuer. Your card issuer may also outline certain withdrawal limits that would impact how much you can spend at one time
|
|
Building credit
|
When used responsibly, applying for, possessing and using a card can affect your credit score and may help to build or improve your credit history
|
Generally, does not impact your credit score, because no borrowing is involved. There are exceptions
|
|
Interest and fees
|
Depending on the terms of the credit card account, interest could be charged on any balance carried over beyond the grace period. Annual fees, late payment fees and other fees may apply
|
No interest is charged. Overdraft fees and ATM transaction fees may be charged, especially if you use out-of-network ATMs
|
|
Fraud protection
|
With a credit card, you're typically responsible for up to $50 of unauthorized transactions, depending on the value of unauthorized transaction(s), if you report the loss before the credit card is used. This is part of the consumer rights provided by federal law regarding credit cards1
|
With a debit card, you could be liable for much more for unauthorized transactions. If you report the debit card as lost or stolen within two days, you may be responsible for up to $50. If you wait longer than two days to report the card as lost or stolen, your liability could be as high as $500 or more
|
Tips on when to use a credit card vs. a debit card
Here are five things to know when you are deciding when to use your credit card vs. a debit card.
-
Credit cards often offer fraud protection
Both debit cards and credit cards may offer fraud liability protection. But there is a difference in the amount you could be liable for if someone uses your card for fraudulent transactions. With a credit card, you're typically responsible for up to $50 of unauthorized transactions depending on the value of unauthorized transaction(s) if you report the loss before the credit card is used. This is part of the consumer rights provided by federal law regarding credit cards.1With a debit card, you could be liable for much more. If you report the debit card as lost or stolen within two days of the loss or theft, you may be responsible for up to $50. If you wait longer than two days to report the card as lost or stolen, your liability could be as high as $500 or more.
Credit cards also tend to be useful for large purchases on electronics and travel, because they may offer extended warranty protection and travel insurance. That said, it's important to have a solid plan for paying off the credit card debt for these purchases.
-
Maximizing rewards programs
Some debit cards may offer rewards, but credit cards are better known for their wide range of rewards cards. They offer cash back programs, travel rewards, points and other perks to improve the user experience.Credit cardholders can take advantage of these programs when buying eligible goods and services: a travel points card when buying airlines tickets, travel rewards cards for hotels, cash back cards for everyday purchases or spending categories, like food, gasoline or restaurants. The important thing to remember is to avoid chasing rewards if the purchases will build up debt beyond your ability to pay it off in a timely manner.
-
Using a credit card can help build good credit
If you're trying to build a credit history or improve your credit score, charging even a small amount on your credit card each month may have a positive impact on your credit score, provided you make timely payments or pay off the statement balance each month. Using your debit card won't affect your credit history, since the transaction is simply a withdrawal of your own money, not a credit transaction. -
Use your debit card for ATM withdrawals
When you need cash from an ATM, you're probably better off using your debit card than a credit card to withdraw funds, even if your bank charges an ATM fee. Most credit card issuers charge a cash advance fee, plus interest on that cash advance. Generally, the interest starts to build as soon as the cash is taken—there is no grace period—and you'll pay a higher interest rate on the cash advance amount than on regular purchases. -
Use a credit card for hotel stays and car rentals
If you are traveling, you might stay at a hotel or rent a car. These businesses will accept cards and put a temporary hold on your funds to act as a deposit. You may be better off using your credit card in this scenario.That's because the hotel or rental agency will charge your debit card for that deposit immediately, withdrawing funds from your checking account and decreasing the amount of money you have available. When you use a credit card, the transaction is typically a hold on your card's available funds, depending on the type of reservation you make.
Make a plan
With better understanding of the differences between credit cards and debit cards, you can make a plan for when you'll use each card. Then set a goal for building an emergency fund so you'll have cash available for emergency expenses and won't have to charge them to your credit card.
Take your next steps with us
Explore the TD Bank checking accounts and credit cards that might fit your needs.