In the decades since credit and debit cards took the world by storm, it’s safe to say that most of us are packing at least one of them in our wallets. Many consumers tend to use both options in their day-to-day lives—but not all. Studies show that almost 30% of US adults don’t own a credit card.
But what is the difference between a debit and credit card, and which one do you actually need? If you’re wondering what type of plastic you should be carrying, here’s what to know.
The Basic Difference Between a Debit and Credit Card
At a fundamental level, credit and debit cards are different for one significant reason: where the money is coming from.
When you use a debit card, the money comes straight out of your bank account. In other words, you can only use as much money as you have in your account at any given time. The money you’re paying with is your own, meaning you won’t pay any interest.
When you use a credit card, the money is like a loan from the lender that issued the card. They’ll have approved you for a certain credit limit when you first opened the card, and you can spend money up to this amount and no further until you pay down the debt. Because the money comes from your card issuer, you will pay interest for borrowing it.
Understanding the Nuances of Credit and Debit Cards
In addition to knowing where the money you spend is coming from, it’s important to keep in mind a few further nuances that differentiate these two types of cards.
- Credit history: Credit cards can help you build up your credit history, while debit cards can’t
- Liability: Using a credit card means you have limited liability for fraudulent charges, while you’ll bear the full liability with a debit card
- ATM withdrawals: Debit cards allow ATM withdrawals for free, but you’ll be charged a fee for a cash advance if you try your credit card at one
- Extended warranties and flexibility: Credit cards offer extended warranties for certain purchases and added flexibility for some hotel reservations and airline tickets
- Managing money: Debit cards are often better for money management, as spending only what you have makes it easier to live within your means
Note that the smaller details will vary by card, so it’s important to read the terms and conditions of your specific card.
This is especially true in terms of the fees and rewards programs of any given card. The right debit card, for example, may offer additional benefits beyond the traditional option.
It’s also worth noting that there are many different types of debit cards and credit cards, so you’ll want to do your research before taking the plunge!
Make Use of Both Types of Cards
At the end of the day, the difference between credit and debit cards should be obvious—but you shouldn’t forget that there’s no need to choose between them. Many consumers use both options for different situations, allowing them to reap the benefits of a credit card for things like warranty extensions while getting the benefits of a debit card for everyday purchases. Consider your financial habits to decide whether one or both options would be best for your needs.
Looking for more tips on making the most of your money? Check out our other posts for additional insights!
