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What’s the Difference Between Credit and Debit Cards?

Last Updated: August 17, 2021
5 min read

A debit card is typically tied to a checking account, so funds must be added in advance to an account before making debit card transactions. When you use the debit card for purchases, the funds will come out of your checking account.

Credit cards act more as a loan. A credit card issuer extends you a line of credit, and you can charge up to that amount on your card. Each month, you are expected to pay off your balance in full, and any balance that carries over to the following month accrues interest charges.

Using Debit vs Credit

By acting as a loan, a credit card gives users the flexibility to access additional funds beyond what they currently have available in their bank account. This can be helpful when you need to make a purchase, such as car repair, and do not have the cash in your checking account. However, this convenience could also cause people to live beyond their means and acquire too much debt.

Chart comparing debit cards with credit cards

Another type of card you may have seen or heard about is a secured credit card. With secured cards, customers must first submit a security deposit, which then becomes their credit limit. Yet in all other ways, a secured credit card is used just like any other credit card. Cardholders must pay their bill every month, and they can incur interest when they carry a balance.

debit card or a prepaid debit card, on the other hand, takes money either directly from your bank account or from the card’s prepaid balance when you use it. Otherwise, debit transactions at a store or restaurant, for instance, are very similar to credit card transactions – you’re swiping the card, inserting the chip or using your mobile wallet.

Building credit history

Because credit cards are effectively loans, all accounts will appear on your credit report and contribute to your credit history. And since every payment to your credit card company is actually a loan repayment, each one is usually reported to the major consumer credit bureaus, helping you to build your credit history when you pay your bills on-time.

This is even true when you avoid interest charges on new purchases by paying your statement balance in full each and every month. Most debit card accounts do not appear on your credit report and do not help you build a credit history.

Protecting yourself from fraud

Credit card users are protected by the Fair Credit Billing Act, a powerful federal law that protects consumers in the event of unauthorized charges, and even undelivered goods and services. The law states that cardholders who notify their card issuer of any unauthorized charges will not be responsible for more than the first $50 of charges if the credit card issuer determines those transactions were unauthorized. (However, Discover cardmembers are never responsible for unauthorized purchases on their Discover card.1)

While debit card users are also protected against unauthorized charges, their liability can be as much as $500. They also lose access to their funds until they are able to prove the charge was unauthorized, a process that can take weeks.

You may also want to check with your bank to see if it offers overdraft protection or charges overdraft fees on debit cards.

Protecting yourself from unreliable merchants

Credit card users may also be protected when a charge is authorized, but the merchant fails to deliver the goods or services as promised. When this happens, credit cardholders can dispute the charge, which results in a temporary credit that becomes permanent if the issuer finds in favor of the cardholder. For example, if a merchant goes out of business before delivering goods or services that you’ve already paid for, you may be protected if you used a credit card. Unfortunately, when a charge to a debit card is initially authorized, but the merchant fails to deliver goods or services, the debit card issuer can’t offer the cardholder the option of a chargeback or any other recourse.

Enjoying rewards and benefits

Many credit cards offer users valuable rewards, such as miles and cash back. Additionally, credit cards also provide a wide range of benefits not found on debit cards such as price protection policies. When traveling, credit card users can also enjoy benefits such as no foreign transaction fees. These rewards and benefits are typically not offered with a  debit card.

Some credit cards do, however, charge an annual fee. Discover has no annual fees on any of its cards.

The Discover debit card offers cash back, along with our credit cards, so you’re earning rewards with credit or debit.

Renting cars and reserving hotels

Finally, credit cards can be useful when renting a car or checking into a hotel. In both cases, customers need to provide a security deposit in some form to be used in the event of damages. When using a credit card, the deposit comes in the form of a temporary authorization that only places hold on the cardholder’s line of credit. But with a debit card, the deposit is in the form of a hold on the cardholders existing funds, and that hold may not be released until several days after the cardholder returns the rental car or checks out of the hotel.

As both debit and credit cards evolve, consumers are constantly evaluating the advantages and disadvantages of each form of payment. By understanding the key differences of using a debit or credit card, you can choose the product that best meets your needs.

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