What’s the Difference Between Credit and Debit Cards?

A debit card is a card that’s tied to a checking or savings account, which means that there is physical cash available in the bank that is linked to the payment card.

Credit cards, on the other hand, are loans from a bank or financial institution that allow the cardholder to make purchases without necessarily having the available cash.

The basic facts: how does a credit card work compared to a debit card?

Both credit cards and debit cards are ways to make purchases using an account number and card-specific information, either entering it online, by swiping the card, inserting the chip or using your mobile wallet.

Chart comparing debit cards with credit cards

Where does the money on a credit card come from?

A credit card is a payment method that represents an open-ended loan made by a credit card issuer. But what does that actually mean?

When you apply for a credit card, the credit card issuer (usually a bank, credit union, or credit card company) reviews your application to determine whether they trust you enough to loan money to you. The card issuer will usually review your credit score and credit history to see what your financial situation is.

Your credit history helps evaluate whether you have the financial ability and demonstrate the responsible behavior required to repay a line of credit. It also helps the card company figure out how much line of credit to extend to you at a time (which becomes your credit limit).

When you’re approved for a credit card, you can spend up to the available credit limit on your account. Your credit limit isn’t necessarily limited to the amount of cash you have in your bank account-which means that you may have more credit available than you can repay right away. Once you reach your credit limit, you’re out of borrowed money, and you cannot keep spending on your card until you repay what you’ve spent.

What kinds of rates, fees, and other costs come with credit cards?

The line of credit on your card may seem like free money, but there may be additional costs. If you read the terms that come with your credit account, you could be subject to additional costs such as interest and transfer fees. It is best to thoroughly review your credit cards terms and conditions to understand what additional costs there may be.

What is credit card debt?

Because a credit card may let you spend more money than you have available in cash at a given moment, a cardholder can get into what’s called “credit card debt.” This is a situation when someone has used more borrowed money than they can repay at the time of the purchases. (This doesn’t mean they’ve necessarily hit the credit limit on their card.)

Consider this: if you use all your cash to pay off your credit card, you might find yourself stuck when it comes time to pay other bills or cover additional expenses. So you may use your credit card to cover those. Now you’ve added to your credit card balance, but still don’t have the cash to pay it off. The outstanding balance will continue to accumulate interest until you’re able to repay it all, plus any interest charges you’ve accrued.

When to use a credit card vs. debit card

The benefit of a credit card is that you can earn rewards on everyday purchases, enjoy security and fraud protection, and have more flexibility around the size and timing of your purchases.

If you need access to cash, however, a debit card is a better choice. You can withdraw money from an ATM without incurring an interest charge. If you use a credit card to take a cash advance, you may find yourself paying interest for the funds, in addition to cash advance fees.

Paying bills with a credit card or debit card

If you earn cashback rewards when you make purchases with your credit card, it’s a great idea to set your credit card as the payment source for your recurring bills. It’s an easy way to earn rewards on your everyday purchases and memberships. It can also help you avoid an overdraft fee from your checking account when your bill due dates don’t line up with your deposits. Just make sure you set your checking account to pay your credit card balance each month, too.

How fraud protection works for debit and credit cards

Different credit cards may offer different kinds of protection against fraudulent purchases. Consumer protection is provided by the Fair Credit Billing Act (FCBA), which limits the amount that you owe if your credit card is stolen and you report it. Some credit cards offer more significant fraud protection. Discover®, for example, has a $0 fraud liability guarantee on all credit cards. This means you’re never responsible for unauthorized purchases on your Discover Card. ¹

With debit cards, however, the rules are a bit different. Debit card fraud is covered by the Electronic Funds Transfer Act (EFTA) which offers various levels of protection depending on when the cardholder reports the debit card lost or stolen, among other factors.

It’s not a bad idea to have a debit card and a credit card on hand

A debit card is useful if you want to get cash from an ATM or have quick access to your money. A credit card is helpful for purchases if you want to:

• Build credit history with responsible use
• Earn rewards on everyday purchases (if your credit card has cash back rewards)
• Cover recurring bill payments (like phone, gym membership, utilities) that have payment dates that might not line up perfectly with when you get your paycheck deposited
• Enjoy peace of mind that your account transactions are covered by fraud protection