Debit vs. Credit: What’s the Difference?

The debate over debit vs. credit rages on.

When it comes to using plastic, the difference between debit and credit is that a debit card allows the user to withdraw deposited funds, whereas credit cards allow consumers to borrow money to purchase items. In other words, you use your own money when you use your debit card, just as if you were to write a check. A credit card, on the other hand, incurs debt.

Understanding how debit and credit work is the key to taking control of your finances. This guide takes a closer look at debit and credit cards and offers tips for using both to your advantage.

What Is a Debit Card?

Consumers who open a checking account at a bank or credit union typically get a debit card that gives them instant access to their money. A debit card works like a check, in that you withdraw money from your own bank account when you use it to pay for a purchase or withdraw cash.

Unlike using a check, however, you don’t have to wait days or weeks for the transaction to clear — the money is debited from your account right away. So, you must limit your debit card spending and withdrawals to the amount of money you have in your account. Otherwise, you’re likely to be hit with a fee for overdrawing your account — the digital equivalent of bouncing a check.

Some banks make provisions to help customers avoid overdraft fees. Wells Fargo, for example, lets you link a savings or credit account to draw from in the event you exceed your checking account balance. And you might get a choice between having overdrafts automatically declined or allowing them to go through for a fee. Note that the average overdraft fee costs about $30 per item, according to the Federal Deposit Insurance Corporation.

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Your bank might offer a debit card rewards program as an incentive for customers to use their cards. Discover, for example, gives 1% cash back on up to $3,000 in purchases each month.

Related: Making This Mistake at Your Bank Can Cost You $10,221

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What Is a Credit Card?

A credit card is a revolving line of credit with a borrowing limit set by the bank that issues the card. You can use the card to make purchases and cash withdrawals up to the amount of your credit limit, and you pay off the debt over time. But unless you repay the entire balance each month, you’ll find yourself paying interest on the outstanding amount.

How much interest you pay depends on the terms of your agreement with the credit card issuer. Some cards charge a fixed annual percentage rate. Others charge a variable APR tied to the prime rate, such as the prime rate plus 5%.

Credit card issuers often charge different percentage rates for different activities. A cash advance could have a higher rate than a purchase, for example. In addition, you might have to pay an annual fee to keep your card active.

Some cards have rewards programs that pay you cash back, travel miles or other bonuses for using your card.

Check Out: Best Rewards Credit Cards

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Credit Card vs. Debit Card: Is Debit Better Than Credit?

Whether debit is a better choice than credit depends on your financial situation and how you manage your money. Each one has unique benefits:

Debit is better for:

  • Eliminating the need to carry cash
  • Instant access to money in your bank account
  • Taking advantage of debit card rewards without accumulating debt
  • Sticking to a budget

Credit is better for:

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  • Earning higher-value rewards
  • Building a credit history that can help you qualify for an auto or home loan
  • Avoiding liability for fraudulent purchases made with your lost or stolen card
  • Protecting purchases with extended warranties and reimbursement for damaged or stolen items
  • Hotel and rental car reservations

One area where credit has a clear advantage over debit is security. All four major credit card networks — Visa, Mastercard, Discover and American Express — offer full liability protection over unauthorized charges. You’re not responsible for any portion of the unauthorized amount.

Although debit card issuers might offer the same protection, they’re not required to. In fact, you’re only guaranteed to be off the hook for unauthorized purchases if you report your card lost or stolen before the thief uses it. Waiting just two days can cost you up to $50, and waiting more than two days increases your maximum loss to $500.

You’re potentially responsible for all of the unauthorized amounts, including losses to linked accounts, if you wait more than 60 days after the bank sends your statement. Even if your debit card number is stolen — but not the card itself — you only have 60 days to report the theft.

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What Happens If I Run My Debit Card as Credit?

In a typical debit card transaction, you swipe your card and enter a PIN to pay for your purchase. But you have the option of having your card run as a credit transaction instead.

In this “signature” transaction, your payment is processed through a credit card network rather than the debit card network used in PIN transactions. The money still comes from your checking account, but because of the way the payment is processed, it might be two or three days before the funds are withdrawn.

Merchants such as gas stations, hotels and car rental agencies place a hold on money in your account as assurance that the transaction will clear. Sometimes that preauthorization hold is larger than your purchase amount. Although holds on PIN transactions usually clear right away, a signature-transaction hold can take a couple of days to clear, and until it does, your available account balance will be reduced by the amount of the hold.

On the positive side, running your debit card as credit might provide the same protections against fraud liability that credit card users enjoy. Depending on your bank’s policies, it can even buy you a little time to add money to your account to avoid an overdraft.

But succumbing to the temptation to overspend is like playing Russian roulette — sooner or later, the debit charge will hit your account before your deposit does, and you’ll have an overdraft fee to contend with on top of covering the initial shortfall.

Learn: What Is Bank Overdraft Protection?

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Should You Use Your Credit Card for Everything?

You should use your credit card to make or save money or help build credit, but only when the benefits of using the card outweigh the risks of running up debt. For example, it might work in your favor to charge normal purchases and even bill payments if you stand to earn rewards on your spending. And the purchase and price guarantees credit cards offer can protect your investment in big-ticket items and ensure that you get the best price possible, all while protecting you against fraudulent use of your account.

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Overall, however, the value of these benefits evaporates if you spend more on interest payments than you stand to gain. So, consider reserving using your card for purchases you can pay off by your first due date to avoid interest charges.

Click through to read more about how to use your credit cards wisely and in ways that will benefit you the most.

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About the Author

Daria Uhlig is a personal finance, real estate and travel writer and editor with over 25 years of editorial experience, including past positions with The New York Times Co. and Oxford University Press, where she was a long-time contributor to The Oxford English Dictionary. Her work has been featured on The Motley Fool, MSN Money, AOL, Yahoo! Finance, CNBC and USA Today.