Banking •

November 2, 2022

Credit card vs. debit card: compared and contrasted

Debit cards spend money directly from your bank account, while credit cards allow you to borrow money to make purchases. There are other differences as well.

Credit vs debit

Most of us have several cards in our wallets—debit cards, credit cards, library cards, and that random old bus pass from years ago! 

When it comes to personal finances, the 2 most common types of cards are credit cards and debit cards. Both allow you to make purchases—but there are some crucial differences between the 2 to consider. 

In this detailed guide, we’ll cover the differences between credit cards and debit cards, from the basics to more nitty-gritty details. 

Credit card basics

Credit cards are cards that allow you to borrow funds to pay for goods and services. When you use a credit card, you are using borrowed money. This money must be paid back—with interest. 

What is a credit card

If you pay the card off in full by the due date, you won’t pay any interest. But if you carry a balance and pay the charges off over time, interest costs will begin to accrue. 

Interest is simply the cost you pay for borrowing the money. It’s measured in annual percentage rate, or APR. 

For example, a credit card may have a 15% APR. That means that if you make a $100 purchase today, and pay it off 1 year later, you will pay $15 in interest (15% of $100). This is a simplified calculation used to illustrate the basics of interest. 

Because credit cards allow you to borrow money, you must apply for them and be approved by a bank or credit union. The bank will look at your credit history—like your history of payments on student loans, credit cards, car loans or other forms of debt—to determine your creditworthiness. If they believe you are a trustworthy borrower, they will approve you for a card and give you a credit limit. 

This credit limit is the maximum amount you can carry as a balance on the card. For example, if you have a $2,000 credit limit, you can put up to $2,000 in charges on the card. 

Your available credit will adjust automatically with each purchase and payment. Your balance will decrease as you make payments, allowing you to spend more. 

For example, if you have a $2,000 credit limit and spend $500 on the card, you will have $1,500 in available credit. If you make a $300 payment, you will now have $1,800 in available credit.

Advantages of credit cards

There are many advantages to using a credit card, particularly for some expenses. 

Earns rewards: Many credit cards come with rewards. Cash back credit cards offer cash back on every purchase—1% back, for example. If you spend $100, you’ll earn $1 in rewards that you can redeem later for cash or other perks. For instance, travel cards offer miles or points on every purchase—say, 1 airline mile per $1 spent. These cards allow you to earn free or discounted travel.

Flexible spending: Credit cards are a form of revolving credit. You get a maximum credit limit and can spend freely as needed. That provides a lot of flexibility compared to a traditional installment loan. 

Builds credit: Using a credit card and making on-time payments can help build your credit. Banks like to see borrowers who actively use credit and make regular payments. There are even credit cards for young adults that are specifically helpful for those who have a limited credit history.

No interest if paid in full: Credit cards charge interest, but only if you carry a balance. If you pay off your card in full each month, you won’t owe any interest. This helps you manage cash flow, fund surprise expenses, and make ends meet while you wait for your paycheck. Just be cautious—if you start to carry a balance, interest charges can really add up quickly—20% APR (or more) is a lot! 

Perks: Some credit cards offer perks, like rewards, purchase protection, travel benefits, and more. Some luxury cards even offer perks like free rental car insurance or extended warranties on purchases made on the card. 

Disadvantages of credit cards

But it’s definitely not all rainbows and sunshine when it comes to credit cards—they have some serious downsides.

Interest charges: If you carry a balance, credit cards charge interest. And they are one of the most costly forms of debt. The average credit card APR is over 20%, meaning a $100 purchase today would cost you more than $20 in interest per year. Credit card debt can be a vicious cycle that’s tough to escape. 

Easy to overspend: Credit cards allow you to spend money that you don’t have. This can be a slippery slope, making it frighteningly easy to get into significant debt. 

Annual fees: Many credit cards have annual fees, often $20 to $150 or more.

Requires credit history: Getting approved for a credit card requires a reasonable credit score and positive credit history.

Fees for cash withdrawals: Most credit cards charge significant fees for withdrawing cash from ATMs.

Can negatively impact your credit: If credit cards are used irresponsibly, they can negatively impact your credit. Missed payments and carrying too large a balance can damage your credit score. 

Debit card basics 

Debit cards are directly linked to your checking account. They allow you to spend money out of your bank account or withdraw cash from an ATM. 

What is a debit card

Because you’re spending your own money, there’s no added cost to use a debit card. You won’t have to pay interest, and there are typically no annual fees—although some banks may charge a monthly fee for a checking account. 

Debit cards can be used directly at payment terminals in-store, as well as for online shopping. You can also use them to withdraw cash from an ATM—usually without fees. 

Debit cards don’t involve credit at all—so they won’t help you build your credit score. On the positive side, you won’t have to worry about negatively impacting your credit. 

Advantages of debit cards

Debit cards allow you to use your own money, for better or worse. Here are some of the key benefits of using debit:

Keeps spending in check: Because you’re spending your own money instead of borrowed money, it’s more difficult to overspend with a debit card. 

No annual fees: Unlike credit cards, most debit cards do not have any sort of annual fee. With that said, some banks may charge a monthly maintenance fee on certain bank accounts. 

Available to almost everyone: It’s easy to open a bank account and get a debit card. You don’t need good credit—you’ll simply need a small opening deposit and your personal information. Credit cards, on the other hand, require decent credit and must be applied for.

Disadvantages of debit cards 

But even a debit card isn’t without disadvantages:

No rewards: Most debit cards don’t earn rewards, while most credit cards do. Psst: The fee-free Mos debit card does earn cash back rewards, and is available to students over 16. Plus, Mos provides access to streamlined scholarship applications, expert financial aid advisors, and more! 

Higher risk of fraud: If your debit card is lost or stolen, thieves may be able to access the funds in your bank account. Because funds leave your account as soon as they are spent, this can create an issue. In most cases, fraud prevention will still protect you—but you don’t have the same breathing room as with a credit card. 

No credit building: Using a debit card will not help you build credit, unlike responsible use of a credit card. 

Overdraft fees: Debit cards charge overdraft fees if you spend more than is in your account. For example, if you have $100 in your checking account, and spend $110 at the grocery store, you may incur an overdraft fee. The transaction may or may not go through—this depends on the bank’s policy. Overdraft fees typically cost around $35 a pop. 

Credit card vs. debit card

Debit cards and credit cards look quite similar, and both can be used to make everyday purchases. Both share similar features, such as:

  • A 16-digit card number

  • Magnetic strips and EMV chips

  • Expiration dates

  • Security codes

  • The ability to make purchases in-store or online

The main difference between credit cards and debit cards is where the money comes from. 

With a debit card, you’re simply spending your own money directly from your bank account. 

With a credit card, you’re borrowing money to make the purchase. You then later pay off the borrowed funds or choose to carry a balance and pay it off slowly over time. 

Debt and interest 

With a credit card, you are spending borrowed money. This creates debt—and costs you money in interest.

A typical credit card may have an APR of anywhere from 15% to 25% or more. The average is over 20%. That means a $100 purchase today would cost you around $120 if you pay it off in 1 year’s time. 

Credit card debt can be a slippery slope. Once you go into debt, it can be hard to get out of it. As interest accrues, your balance goes up, creating a vicious cycle. 

Despite its downsides, credit card debt is quite common. The average American had nearly $6,000 in credit card debt at the end of 2021. Given the average APR of 20%, that means the average American is spending $1,200 per year on interest alone. 

Debit cards, on the other hand, don’t involve debt or interest. They simply enable you to spend your own money out of your bank account. 

Purchase protections

Both credit and debit cards may have certain forms of purchase protection. These features can help protect you in the case of fraudulent transactions made on your card.

Purchase protection debit vs

In general, credit cards offer superior purchase protection. This is due in part to the fact that credit cards simply give you more time. If a fraudulent transaction is made, the money won’t be immediately drained from your bank account as it would be with a debit card. 

Credit cards also allow chargebacks, which is a feature you can use to dispute a charge on your account. For example, if you go to a store and are incorrectly charged twice, you can use a chargeback to request that the credit card company correct the error with the merchant on your behalf. 

Some credit cards even offer extra perks, like extended warranties. For example, a card may offer to extend the manufacturer’s warranty on certain purchases. 

Debit cards do still offer some level of purchase protection, but in general, credit cards offer greater protection. 

Access to cash

Both debit and credit cards allow access to cash, but the process is different. 

With a debit card, you simply use an ATM to withdraw cash from your checking account. You can also get cash back while making a purchase at a retailer. 

With a credit card, you can request a cash advance. This is essentially borrowing cash using your existing credit limit. You will be charged interest starting on day one, and there is often a flat fee as well. Plus, credit cards may charge higher interest on cash advances than they do on standard purchases. 

Credit card cash advances can be completed at banks, ATMs, and by using checks provided by the credit card company. Because of the fees and high-interest charges, it’s best to think twice before using a credit card cash advance.

Rewards

Many credit cards offer rewards for your spending—but most debit cards don’t. Cool news: The Mosstudent debit card gets you cash back when you spend, and it’s available for students 16 and over!. Learn more about Mos here

Rewards credit card

For example, a cash back credit card may offer 1% back on every purchase you make. A $10 purchase would therefore earn you $0.10 in rewards. Other cards offer airline miles, hotel points, or other rewards. 

Very few banks offer rewards on debit card purchases, so this is one area where credit cards clearly win out. 

But just remember: Credit cards charge interest if you carry a balance. There is a reason they offer rewards—you might earn 1% cash back, but don’t forget about the 20%+ interest charge! 

Savvy credit card users can optimize their rewards by paying off their cards in full each month. That way, you can earn rewards and not pay any interest—a win-win! 

Eligibility and access 

Debit cards are easy to get and come with checking accounts. Credit cards must be applied for, and generally require you to have some history of successfully managing loans in the past.

Credit card eligibility

Credit cards must be applied for. The bank will review your credit profile to determine if they want to approve you for the card. Each bank has its own requirements in terms of credit ratings, but most cards require at least decent credit scores in the 600s or higher. 

Your credit score will also affect the type of credit cards you can apply for, as well as the APR you will be offered. The better your score, the more cards will be available to you—and the lower your interest rate may be. 

Finally, credit cards also require income. You will need to list your annual income on your credit card application. Your income will determine your eligibility and how much credit the bank is willing to extend to you. 

For example, someone with a low income may receive a low credit limit—$1,000, for example. Or, they may be denied altogether. Someone with a high income and good credit would likely get a much higher credit limit. 

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Final thoughts

The main difference between a debit card vs. a credit card is that debit is used to spend money in your bank account, while credit cards allow you to spend loaned funds. There are pros and cons to each, depending on your approach to personal finance. 

For the simplest option, stick with a debit card. You won’t have to worry about accumulating debt, and you can’t spend more than you have. Plus, almost anyone can get a debit card, while credit cards are more exclusive to those with decent credit scores. 

If you’re a student looking for a modern banking solution, check out Mos. Mos provides students with zero-fee banking and debit card access, plus cash back, scholarship opportunities, and much more.

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