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Debit vs. Credit: A Comprehensive Guide

Andrew Secker, Private Banker, First Republic Bank
July 13, 2022

  • Debit cards allow you to withdraw money directly from your bank account, providing a streamlined and convenient way to pay for goods and services. 
  • Credit cards function as a line of credit, allowing you to borrow funds up to a preauthorized amount, which you then pay back to the card issuer. 
  • Credit cards can help build your credit history, but a poorly-managed credit card may damage your credit.  

Debit cards and credit cards provide convenient ways to pay for purchases, but they function quite differently. Debit cards offer easy access to the money in your bank account, whereas credit cards serve as a line of credit that allows you to borrow money and pay it back later. Many consumers opt to use both debit and credit cards to cover their purchases, but each type of card has its own set of advantages and disadvantages. 

Understanding the strengths of each type of card can help you make a more informed decision about whether you should use debit cards, credit cards or a combination of the two. This guide outlines the differences between debit vs. credit cards, and the benefits and drawbacks of each. 

How does a debit card work?

Debit cards allow you to pay for purchases using money from your bank account without having to carry cash. Using a debit card instantly withdraws funds from the account when the merchant runs the card as debit. In this instance, debit card transactions are essentially the same as using cash, without the need to have cash on hand. 

Debit cards are usually a standard feature with checking accounts, allowing the account owner to access their money easily. However, there are other types of debit cards; for example, prepaid cards, which simply reduce the balance on the card when a purchase is made. Some debit cards may have additional features, such as rewards, but perks like those are much more common with credit cards. 

Benefits of debit cards

Using a debit card, as opposed to a credit card, has several advantages, including: 

  • Money comes right from your account: Debit cards typically only allow you to access money that’s already in a linked account or loaded onto the card. For some, this may curb the urge to overspend; it also makes it more difficult to do so. 
  • Straightforward: Debit cards generally have few frills, which may make them ideal for buyers looking for a simple and convenient payment option. 
  • Fewer fees: Credit companies charge interest on balances not paid in full by the due date and may also charge additional fees. Some financial institutions may charge fees associated with maintaining a checking account or other additional fees for specific features or requirements of the account, depending on the institution. 

Drawbacks of debit cards

Many consumers use debit cards but some card features may be less desirable than those provided by credit cards. For instance:

  • Debit cards don’t build credit: Does a debit card build credit? Unfortunately, no. This remains true even if you choose “credit” at the point of sale. This also means you’re less likely to hurt your credit than with a credit card.
  • Less rewards: Few debit cards allow the card owner to earn money-saving rewards or provide extra benefits, such as travel rewards. This is usually more common with credit cards.

How does a credit card work?

In most cases, credit cards function as a line of credit. You can also have a secured card, which is essentially a credit card, but it requires a refundable security deposit of cash to open a line of credit. It's using your own money to help build credit. Often times the product is reviewed and the original deposit can be returned if certain parameters are met. Credit cards allow you to borrow money to make transactions up to the card’s credit limit, then repay your lender, usually with interest if the statement balance isn't paid in full each month. 

The process of obtaining and using a credit card involves several steps. First, consumers apply to a credit card issuer, and are approved or denied for credit based on their credit report. If approved, the cardholder can make purchases up to a predetermined limit. It's also important to note that there are traditional "pay as you go" cards, whereas "charge cards" require the entire balance to be paid.

Each transaction made on the card adds to its balance. Consumers can then pay off their balance in full by the statement due date, or in smaller increments over time. Paying the balance off in full by the payment due date allows borrowers to avoid having to pay interest. If you opt to pay off a card in smaller increments and the statement balance is not paid in full by the payment due date, you’ll be charged interest — generally from 15% to 23%

Failing to make the minimum monthly payment on a credit card can result in fees or other penalties. In addition, credit card activity does appear on your credit reports and has an impact on your credit score, so missing payments may have longer-term effects on your credit.

Benefits of credit cards

Credit cards have several advantages that distinguish them from debit cards, including:

  • The ability to build credit: Credit cards contribute to a borrower’s credit history and can help both credit beginners and those with excellent scores build their credit.
  • Different types of cards: Card issues allow borrowers to access different types of credit cards depending on their needs or credit history. Those looking to build credit may opt for a secure card, while those seeking greater rewards may open a travel reward or cash-back card.
  • Rewards save you money: A travel reward or cash-back card can save you money when you use it to make purchases, as long as you avoid interest by paying the balance in full each statement cycle. 
  • Added Benefits: Certain credit cards may offer added rewards, such as airport lounge access or dining credits.

Drawbacks of credit cards

Credit cards have several advantages, but they also have a few drawbacks compared with debit cards. These include:

  • Opportunity to overspend: Credit limits are often higher than money you may have in the bank. Without appropriate discretion, this can lead to overspending, which results in high-interest debt and potentially credit damage. 
  • Interest rate: Interest rates on credit cards tend to be high. While borrowers can avoid interest by paying off their balance in full each month, carrying a balance month-to-month can be costly.
  • Fees: Credit cards often come with fees, which may include annual fees, missed payment fees, foreign transaction fees and cash advance fees. 
  • Can require more work: While debit cards withdraw money from your account to cover your purchases, credit cards require that you pay your credit card bill each statement cycle. Setting up autopay can cut down on the time spent managing your credit card. 
  • Risk of damaging your credit: Credit cards can build credit, but also have the potential to damage it. Missing credit card payments, or maintaining a high balance on your card, has the potential to lower your credit score. 

Debit or credit: Which should you use?

When it comes to using debit vs. credit cards, there’s no set answer. Some consumers prefer one over the other, depending on their individual needs and priorities, while others use both debit and credit cards for their everyday financial management. 

  • Consider using both if: You appreciate the benefits of both types of cards and would simply prefer to trade off depending on the transaction.
  • A debit-focused approach may suit you if: You prefer a low-risk payment approach and you have other ways to build credit, such as through a personal line of credit, or mortgage.
  • A credit-focused approach may suit you if: You believe you can manage credit wisely, and you’d like to do one or more of the following: build your credit history, earn rewards, use credit card benefits and enjoy enhanced security features.  

No matter what you choose, take a strategic approach to financial management. Always have a solid financial plan, and make money moves that align with your goals and your financial situation — whether those moves involve using a debit card, credit card or both. 

If you’re unsure how to decide between a credit card vs. debit card, consider turning to a financial professional for help evaluating your situation and determining which strategy will benefit you most.

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