At a glance, debit and credit cards look exactly the same. They both have the identical number of digits, are the same size, carry the same identifying information and have the logo of a payment network on them, such as American Express, Mastercard or Visa.
Just as your mother told you, though, appearances can be deceiving. The similarities end with looks alone. Debit and credit cards are very different payment types.
Applying for a card
The differences begin at obtaining the card. To get a credit card, you must apply for an account with a card issuer. They will check your credit history to determine whether you are a good credit risk. However, since debit card holders prepay their accounts, generally with their checking or savings account, no line of credit is generally offered. Thus, anyone who can verify his or her identity and has a bank account will be approved for a debit card.
Using credit and debit cards
When you charge something on your credit card, you are accessing a line of credit to make a purchase, obtain a cash advance or transfer a balance from another card. Purchases generally do not cost a fee, but you will have to pay fees for balance transfers or cash advances. Credit card users receive a statement each month with a payment due date. To avoid interest, a cardholder can pay their entire statement balance in full and on-time each month. If the user carries a balance, they will need to make a minimum payment and will be charged interest on the balance. It is important to remember that interest is always charged on cash advances, even if the amount is paid in full by the statement due date.
To use a debit card, users must pre-pay their account in some way. Debit cards that are linked to bank accounts will only have access to the money in that account. Prepaid debit cards must be funded with direct deposits, cash or by some other means. Once the consumer has spent the available funds, subsequent transactions will be declined until money is added. Credit cards, on the other hand, will authorize transactions up to, and sometimes above, the user’s credit limit.
The fee structures of debit and credit cards are also quite different. Some credit cards charge annual fees, but the majority do not. Instead of these fees, credit card companies make money by charging interest and fees for other services, including balance transfers, cash advances and foreign transactions. Credit card holders may also be charged fees for late payments.
Fees are much more complex for debit cards. It is rare to see a debit card that charges cash advance fees, but many will charge an ATM fee. Debit card users may also be charged for adding funds, checking a balance or making a purchase. There may also be a monthly maintenance fee, and almost all debit cards will charge a foreign transaction fee if the users makes a purchase outside the United States, which is something many credit card issuers do not do.
Benefits and rewards
The ability to earn rewards is another key difference between debit and credit cards. Many credit cards offer rewards such as miles, points and cash back for purchases. Sometimes, these are offered to cardmembers as a sign-on bonus. Credit cards also offer perks, such as purchase protection and travel insurance policies. Lastly, cards that are co-branded with hotels and airlines offer benefits such as room upgrades or free checked bags.
Debit cards, on the other hand, hardly ever offer rewards and have few benefits. Some cards may offer roadside assistance or basic purchase protection options, but many do not even carry these perks.
Fraud and dispute coverage
Credit cards are protected by the Fair Credit Billing Act, which means users cannot be held liable for fraudulent charges over $50, and most credit card issuers take this further by offering zero liability policies. Credit card companies will even offer protection on purchases that are not as described or that you did not receive. In many cases, the card holder can request a chargeback, which will result in the immediate reversal of the charge, which ensures the issue is permanently documented.
If an unauthorized charge is made to your debit card, it can unfortunately take much longer to resolve, and you have few legal recourses available, particularly for customers who authorize charges but do not receive their goods.
Since you are not borrowing money when you use your debit card, it has no impact on your credit score. Credit cards, however, will have a major affect on your credit. Every credit card account that is opened will appear on your credit report, and debt levels and payment history are both important factors in your credit score.
Once you have learned the differences between credit and debit cards, you can choose which product is better for you.