The Difference Between Debit and Credit Cards [And Why It Matters]

The convenience that debit and credit cards bring to the table are hard to match. They are portable, safe to use and are powerful financial tools. Debit and credit cards even look identical.

They are of the same size, shape, have 16-digit card numbers, expiration dates and require personal identification number (PIN) codes. However, their being similar ends there. Beyond physical appearances, the system between the two cards are different.

A debit card doesn’t function the same way as a credit card. It’s important to know the difference between these two powerful financial tools for you to know how best to use them and how each can affect your financial standing.

The main difference between these two types of cards is where they take the money from. With a debit card, the money is drawn from your checking account each time you make a purchase.

Meanwhile, with a credit card, payment is made through borrowing money from a line of credit. In other words, debit cards use your own money and credit cards use the bank’s money. 

Both debit and credit cards have advantages and disadvantages. Here are the things you need to know about the difference between debit and credit cards.

Debit Cards

Debit cards are tied to your checking account. Whenever you use your debit card for payment, money is pulled from your checking account. There is no borrowing involved when you use your debit card. 

The full amount of payment is pulled from your own pool of funds. With a debit card, you can add money in your checking account just by making a deposit. You can do this anytime. 

Another trait shared by debit and credit cards is that you can use both at similar places. You can use a debit card anywhere a credit card can be used. As mentioned earlier, debit cards, like credit cards, need to be used with a PIN code for you to complete a transaction.

Debit and credit cards have different laws that limit your liability. For debit cards, the Electronic Funds Transfer Act protects your liability. While this law can protect you from any fraudulent use of your debit card, you need to act fast.

Otherwise, you could risk losing all your money in your checking account. This law works if you report your lost or stolen debit card to the bank before someone else could use it. If you do this, you won’t be liable for transactions that are made with your debit cards.

If you let this pass and wait for two business days after the fraud, you can end up paying up to $50. If after 60 days you still haven’t reported to the bank, you could then end up paying up to $500.

Do this for another 60 days and your liability is unlimited. This means that if someone used your debit card and used up everything in your checking account, you lose all your money in your checking account.

According to Experian, “even if you do report a fraudulent debit card change in time, reimbursement can take up to two weeks. That can put you in a precarious situation. You may not have enough cash to pay for such vital expenses as your rent, mortgage, food or gas.”

To Summarize, with debit cards:

  • Payments are pulled from your checking account.
  • You can use debit cards anywhere credit cards can be used.
  • Electronic Funds Transfer Act protects your liability.

Credit Cards

With credit cards, the money to complete a transaction is borrowed from a line of credit. If debit cards are linked to your checking account, credit cards are linked to a line of credit.

While this might sound better because you are not using your personal money, your purchases with credit cards have interests. However, according to The Balance, if you don’t have balance over month to month, there will be no charged interests. 

Another feature with using credit cards you can take advantage of is credit score. For the banks, your creditworthiness is determined by your credit score. There are different factors that influence your credit score such as your payment history, age of credit, credit mix, amount of debt relative to credit limits and recent applications for credit.

Here are more other benefits of using credit cards according to Canstar:

  1. Rewards Programs
  2. Frequent Flyer Miles
  3. Signup Bonuses
  4. Cashback
  5. Complimentary Travel Insurance
  6. Price Protection Insurance and Purchase Protection Insurance
  7. Fraud Protection
  8. Convenient and Safe Online Shopping
  9. Less Cash On Hand
  10. Works In Any Currency
  11. Near Universal Acceptance
  12. Build Your Credit Score
  13. Interest-free Days

A good example for the rewards program is the Amazon credit card. The Amazon prime rewards visa signature card and Amazon rewards card of Amazon allows you to earn rewards not just through purchases from Amazon but also from any establishments that accept Visa cards.

Amazon offers different types of cards but with an Amazon prime rewards visa signature card, you are offered discounts based on rewards points. Here’s the breakdown:

  • 5% on Amazon.com
  • 2% on restaurants, gas stations and drugstores
  • 1% on all other purchases

However, to apply for an Amazon credit card, you need to have a good credit score of at least 640. For cards with better benefits, you’ll need at least a 720 credit score. 

If you are unsure of your credit score, you can make use of free and simple to use services such as Credit Sesame. Credit sesame can help you with knowing your credit score, credit monitoring, protection and financial advice.

But perhaps another feature that gives the credit card an edge over the debit card is the law that protects your liability. The Fair Credit Billing Act (FCBA) ensures that you are protected and that you won’t be responsible for fraudulent use of your credit cards.

We hope you learned something new about the difference between debit and credit cards. Use the knowledge you gained here to be more responsible with using both your debit and credit cards.