There are huge differences between swiping a debit card and swiping a credit card. And these differences go far beyond whether or not you’re racking up credit card debt.
Debit and credit cards give you different protection against fraudulent purchases, separate types of rewards, and have different effects on your ability to borrow money in the future. Here’s what to consider before you decide which type of plastic to pull out of your wallet.
What Is a Debit Card?
When you make a purchase with a debit card, the money will be drawn from an account where you already have money saved. Generally, debit cards are linked to checking accounts, but you can also get a debit card linked to your savings account or a prepaid card balance.
Debit Card Linked to Your Bank Account
Your bank will likely issue you a debit card linked to your checking account for free. Sometimes, you can get a free debit card for your savings account, too, though you may have to pay a small card issuance fee.
Debit Card Linked to Your Checking Account
When you are using a debit card linked to your checking account, the money will automatically be deducted from your account balance. Depending on the retailer and your bank, this ‘automatic’ transaction might not be immediate – it could take a couple days to reflect on your online statement.
Debit Card Linked to Your Savings Account
When your debit card is linked to your savings account, your bank may place restrictions on how many withdrawals (or transfers) you can make every month. Until April 24, 2020, there was a federal rule called Regulation D that required banks to set this limit at six withdrawals or transactions per month.
But Regulation D is no longer in effect. Just because the federal government has removed the regulation doesn’t mean every single bank has followed suit. Your bank may impose fees if you make more than a set amount of outbound transactions per month – it’s usually six as a matter of legacy, but check the fine print for your account.
Types of Debit Cards
There are four types of commonly used debit cards.
Standard Debit Card
This is the workhorse debit card that you likely use multiple times a day. Honestly, it’s practically a way of life. The standard debit card is tied to your checking account or a money market account. With a standard debit card you can pay for goods and services in person or online, plus you can use it to withdraw money from ATMs. There is likely a cash limit to withdrawals and some institutions only let you withdraw money a certain amount of times per day.
Less common and more restrictive than a standard debit card is the ATM-only card. With this limited-use card you can withdraw money from your checking and money-market accounts only from an ATM. Some issuers let you tie the card to your savings account.
Prepaid Debit Cards
Prepaid debit cards can be purchased at major retailers or drug stores. You pay a certain amount of money to load the card, and then you’ll be able to use it to make purchases wherever that card is accepted. Ideally, you’d look for a prepaid card issued by a major credit card company like MasterCard or Visa to ensure it will be accepted.
Prepaid cards are usually used by people who do not qualify for a traditional checking account because their name has ended up in ChexSystems. But prepaid cards tend to come with excessive fees that can eat away at your balance. A better option may be to open a checking account with a bank that does not use ChexSystems and will give you a second chance checking account.
EBT Debit Cards
Technically, EBT cards are debit cards, too. You might receive an EBT debit card so you can access your SNAP/food stamp or cash benefits from the state. To get an EBT debit card, you’ll need to apply and qualify for specific social welfare programming.
Because EBT debit cards are so different from other types of debit cards, we won’t dig too deep into them in our analysis today.
What Is a Credit Card?
When you swipe a credit card, you’re borrowing money from the bank. At the end of your statement cycle every month, you’ll be required to pay the bank back in full — or pay a hefty interest rate.
If you can’t pay the full balance, it’s advisable to at least pay the minimum balance due. That’s because if you do pay this amount, it could show up as a positive mark on your credit report. If you don’t – and you’re at least 30 days late – it could show up as a negative mark. Negative marks can lower your credit score in an especially big way when they’re tied to late payments.
Unsecured Credit Cards
Most credit cards are unsecured. That means you don’t have to put down a deposit or any collateral to open the credit card. If you meet the issuing financial institution’s minimum credit requirements, they’ll let you borrow money as needed, up to a set credit limit.
Unsecured cards can be issued by a bank or other financial institution directly. You’ll also frequently see unsecured credit cards issued as store credit cards, branded by a particular retailer.
Secured Credit Cards
Don’t meet the bank’s minimum credit requirements? Some financial institutions will help you rebuild your credit by issuing a secured credit card. To open this credit card, you will need to put down a deposit.
Let’s say you put down a deposit of $500. The bank will issue you a line of credit for $500. They know you’re good for it because they’ve already got your money in their pocket.
Then, when you swipe and borrow with your secured credit card, hopefully you’re paying the bank back every month. Ideally you’ll pay in full so you don’t have to pay interest charges, but the entire point of this card is to pay at least the minimum due every month to start putting some positive marks on your credit report, which could up your credit score.
If you use this card responsibly for a set period of time — anywhere from six months to two years – most financial institutions will usually give you the opportunity to upgrade to an unsecured credit card. If you take them up on the offer, your deposit will be returned to you.
Pros & Cons of Debit vs Credit Cards
There is a time and season for everything. That includes credit and debit cards. Which one you choose to use will depend entirely on your personal circumstances. Let’s look at some of the pros and cons of each.
Heightened fraud protection on purchases
Fringe benefits like cash back or airline miles
Can help you build or rebuild your credit
Interest rates tend to be substantial
Can hurt your credit history if not used properly
May encourage excessive spending
More likely to pay annual fees
The Upside of Credit Cards
Credit cards are more secure than debit cards. That’s why some experts recommend using them over debit cards for online purchases. If your credit card information is stolen and then used to make purchases, there is a federal law called the Fair Credit Billing Act that restricts your burden of the fraudulent charges to $50. But it isn’t hard to find a credit card company who will issue you a $0 liability benefit.
Plus, if there is a fraudulent charge made on your account, with credit cards you have some time to sort it out. You should immediately report the issue as soon as you become aware of it, but it’s not like your checking account where a fraudulent charge could cause your rent check to bounce.
Credit cards can also help you establish or rebuild your credit history when used responsibly. A positive credit history not only means more banks will be willing to lend you money, but also that they’ll be willing to do so at a lower interest rate.
Finally, credit cards tend to come with extra perks like cash back, airline miles, or points towards free stays at hotels. These freebies aren’t available with debit cards.
It’s not uncommon for the signup offer alone on a travel rewards credit card to end up equating to $500 – $1,000 worth of travel freebies. Then, there are the points you earn on each and every purchase.
Cash back credit cards don’t come with signup bonuses as regularly, but the rewards are more flexible. If you’re earning 1% – 5% cash back on every purchase, often you’ll be able to use this cash back to pay off a portion of your credit card bill. Or, in many cases, you could even transfer the cash directly to your bank account.
The Downside of Credit Cards
It’s important to remember that the reason credit card issuers offer such great perks is because enough people get into trouble with credit cards that they’re still able to turn a profit. A free plane ticket isn’t worth paying hundreds or thousands of dollars in interest. If you’re not paying off your credit card bill in full every month, the bank is likely pulling in a bigger “reward” than you are.
Plus, there are other expenses to worry about — like annual fees. Some credit card companies will waive this fee for the first year, but then you’ll be charged every year on your credit card anniversary.
And make no mistake: Interest rates on credit cards tend to be extremely high. It’s rare to find a card that offers an APR in the single digits. Most cards have an APR range with a high end between 20% and 30%.
This makes credit card debt an extremely expensive way to borrow – though they are still cheaper than payday loans, or even some personal loans if you don’t have perfect credit. If you dare to take out a cash advance against your card, the rate can climb even higher.
Potential Impact on Your Credit Scores
If you do get into trouble with credit cards to a point where you’re making late payments, it’s highly likely that you’ll start to see negative line items on your credit report. This can lower your credit score, which will make less banks willing to lend you money in the future. When they do, it is likely to be with a higher interest rate.
Aside from late payments, another key factor in your credit score is credit utilization. To figure out your credit utilization, you’d take the total amount of money you currently owe and divide it by the total amount of your credit lines.
Let’s say you have three credit cards. You’ve borrowed $0 from a card with a $2,000 limit, $750 from a card with a $1,000 limit, and $150 from a card with a $500 limit. The total amount you borrowed was $900, and your total credit limit is $3,500. That makes your credit utilization about 26%.
Generally speaking, you want to keep your credit utilization below 30% to preserve your credit score.
No chance of paying interest charges
Don’t have an impact on your credit score
You’re not borrowing money from anyone – this card is linked to money you already have in your bank account
No annual fees
Less protection and more inconvenience in instances of fraud
Can’t help you build your credit history
Doesn’t come with perks on every dollar spent
The Upside of Debit Cards
When we look at the behavioral aspect of personal finance, debit cards tend to be a lot safer. That’s because you’re not incurring debt when you swipe your debit card. Because you’re not incurring debt, the purchases you make with your debit card will not directly affect your credit report or credit score.
Also because you’re not borrowing money, you won’t have to worry about racking up expensive interest charges. Debit cards tend not to come with annual fees like a credit card would, but the checking account your debit card is linked to might come with a monthly maintenance fee – even though the debit card itself isn’t costing you anything.
Generally speaking, you won’t be able to spend more money than you have. In some instances, you may be able to overdraw your account (which is likely to come with an overdraft fee,) but most banks won’t let you do this more than once or twice before freezing your account.
The Downside of Debit Cards
While debit cards won’t hurt your credit report, they also won’t help it. Responsibly managing your checking account doesn’t matter in the eyes of the credit bureaus.
Debit cards also make you more vulnerable in instances of card theft or fraudulent purchases. The money behind your debit card is real, and it is yours. If someone takes it, even after you report the theft it could take a not-insignificant amount of time before the bank corrects your balance. Plus, you can be held liable for up to $500 of the loss rather than the $50 max for credit cards.
Debit cards rarely come with the fancy perks you’ll find with credit cards, either. Coming across a debit card that offers any version of cash back or airline miles is like spotting a double rainbow.
Alternate Rewards for Debit Cards
That’s not to say there’s never any bonuses for the bank account associated with your debit card, though. Signup bonuses (typically issued in a lump sum of cash) are common, and tend to be dramatically larger on savings accounts over checking accounts.
Checking account bonuses tend to be found on accounts with higher balance requirements and monthly maintenance fees. These bonuses tend to be linked to the amount of direct deposits you receive within the first 30, 60, or 90 days of account opening. It’s not uncommon to see these bonuses range from $100-$300, but they tend to be on the lower end of that spectrum.
Savings account bonuses are a little larger, and tend to hinge on the amount of deposits made over a 30-, 60- or 90-day period – whether they’re direct deposits or not. The quantity of the deposit requirements tends to be larger. Think five digits.
But savings account bonuses also tend to be higher. It’s not uncommon to see offers for $300-$500 if you meet the bonus offer’s requirements.
Should I Use a Credit Card or a Debit Card?
The decision to use a debit or credit card is contextual and should be considered with nuance. If you know you tend to have trouble with overspending, it might be wise to shy away from credit card use. If you’re still concerned about security while shopping online, you could use a third-party service — like PayPal or Venmo — for additional potential protections.
If you have a history of using credit cards responsibly and pay them off every month without fail, it might be worth getting a free hotel room or two to swipe the plastic. It’s also safer to use a credit card if you’re worried about fraud.
But remember that no one is perfect at anything. You’re only good with credit cards until you’re not. With a credit card, any one among us is just one financial emergency or indulgent purchase away from sky-high interest rates and a spotty credit report.
Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.