It’s easy to get confused between debit and credit cards. Both carry the logo of a major credit card company, such as Visa or Mastercard, and can be used at most retailers to purchase goods and services.
The key difference between the 2 types of cards is where the money is taken from after a purchase is made. When you use a debit card, the money comes directly from your checking account. When you use a credit card, the purchase is charged to a line of credit that you are billed for later.
How the cards are managed and the fees you can incur all vary but stem from this difference. No matter what type of card you choose, it’s important to understand how it works, what your responsibility for payment is, and what fees may be associated with it.
What Is a Debit Card?
A debit card is issued by a bank to its customers for the purpose of accessing funds without having to write a paper check or withdraw cash first. So while a debit card might look exactly like a credit card, it doesn’t function the same way.
Getting a Debit Card
When you open a checking account, you will typically receive a debit card as part of the account-opening process. If not, you can request it directly from your bank. This debit card is linked to all of the funds in your checking account.
When you receive your debit card, your card issuer (meaning your bank or credit union) may give you a personal identification number (or PIN). You can then change your PIN to a unique number you will remember.
Using Your Card
A debit card can be used anywhere credit cards are permitted. If your debit card has a Visa logo, for example, it can be used anywhere that takes Visa.
Each time you use your card to purchase goods or services or to access your funds at an ATM, you will have to enter the PIN number you set up previously. This is an important way that fraud is controlled. For this reason, it is important to remember to never share your PIN with anyone. Also, do not write it down to keep it in your wallet or on your card.
Debit cards take money directly out of your checking account when you make the purchase. This places a “hold” for the amount of the purchase. The merchant sends in the transaction to their bank and it is transferred to the merchant’s account. It can take a few days for this to happen, and the hold may drop off before the transaction goes through.
These “holds” can be for amounts greater than the actual transaction and can add up quickly. If you have too many holds on your account, future transactions may be declined or you can overdraft your account.
Overdrawing on Your Account
It’s important to keep a running balance of your checking account to make sure you do not accidentally overdraw on your account. This can happen because of the delay in posting transactions between the merchant and your bank.
In the instance that you do spend more than you currently have in your account, there are a few things that might happen depending on your card, the amount of the overdraw, and the options you selected when establishing your account:
- Your transaction will be declined and you will not be charged any fees.
- Your transaction will be declined and you will be hit with a non-sufficient funds fee or NSF fee. Some banks charge multiple NSF fees per day and they can range between $27 to $35 each.
- Your transaction will be approved, but you will be hit with an overdraft fee. An overdraft fee typically runs $25 to $40 per transaction and multiple fees could hit if you attempt more than 1 purchase.
- Your transaction will be approved, but you will be hit with a transfer fee. This option is available when you link your savings to your checking account for overdraft protection. This transfer between accounts has a fee that is generally lower — about $5 to $10 per transaction or per day.
As you can see, fees can add up for overdrawing your account. Avoid these fees by ensuring you keep an eye on transactions hitting your account and modify your spending accordingly.
How Do I Pay My Bill?
When you use your debit card, you are really just tapping into your own bank account. So while you do need to ensure that sufficient funds are in your account at all times, there are no bills to pay at the end of each month.
You may still receive a statement, but since the money is being taken out of your account as you spend it, you do not need to send in a check or set up auto-pay for this account. You are not borrowing funds from anyone, so there are no interest charges associated with using a debit card.
For people who are trying to budget, a debit card linked to a checking account may be a better option than a credit card as it limits spending to what you currently have on hand in your checking account.
Pros of a Debit Card
Do you also like the idea of not having to stop by the ATM or bank to get cash every time you want to buy something? Besides convenience, debit cards offer a variety of benefits:
- Keep Spending in Check — The main benefit of debit cards is they make it more difficult to spend money you don’t have. Debit cards can be a good way to keep your budget on target.
- Withdraw Cash Easily — You can use your debit card to withdraw cash from ATMs or to get cash-back at a point of sale when you make a purchase.
- Less Maintenance — You can set up alerts to monitor debit card activity and you won’t need to make monthly payments.
- Interest-Free — You won’t pay interest on your purchases.
Cons of a Debit Card
While there’s a lot to like about using a debit card, there are some important items to be aware of:
- Unexpected Fees — You can still be subject to fees for things like out-of-network ATM fees, transfer fees, and overdraft fees.
- No Credit History — Using a debit card (even when you run it as a “credit”) won’t help you build your credit history. Credit usage and payment record are 2 of the main factors that help you improve your credit score.
- Less Flexibility — Some companies (like rental car agencies and hotels) may not accept debit cards because they want to have an opportunity to bill you for damages to their property if necessary.
- Significantly Less Fraud Protection — You must report your card lost or stolen within 2 business days of learning about the loss or theft or you might be liable for fraudulent charges on your debit card. If you wait longer (or don’t notice until later), you could be on the hook for some or all of the charges. We’ll go into more detail about fraud below.
- Access to All Your Funds — If your debit card falls into the wrong hands, thieves could gain access to all of the money in your bank account, leaving you on the hook for purchases you didn’t make. Even if you notice quickly, the bank may take a while to have your funds reinstated to your account.
- No Rewards/Other Benefits — You might miss out on rewards or cash-back for the dollars you are spending with a debit card. Also, debit cards typically offer fewer protections for things like rental cars, travel insurance, and lost luggage.
Common Debit Card Fees
While debit cards don’t charge interest, there are a few other fees users may have to pay:
Monthly Account Fees
Some banks and credit unions charge monthly fees to maintain a checking account that may be linked to a debit card.
Fees for Overdrawing Your Account
We went into detail on these fees above, but if you opt-in to overdraft protection, your bank or credit union may charge you an overdraft fee to cover the cost of a purchase or ATM withdrawal if there’s not enough money in your account. These fees can range from $25 to $40+ per transaction depending on the bank.
If your checking account is linked to your savings account, you might incur a transfer fee to move money over to cover the cost of your purchase. These range from $5 to $10 per transaction.
Out-Of-Network ATM Fees
Debit cards give you the ability to pay for things, without using cash. If you need cash, you can also use your debit card to withdraw money from ATMs.
If you remove cash from a bank that’s not your own, you may be charged an “out-of-network” fee. In addition to this fee, if you choose to take money out of an ATM internationally at a bank other than your own, you will also incur a currency conversion fee, usually ranging from 1% to 3% of the purchase amount.
Foreign Transactions Fees
If you use your debit card to pay for purchases internationally directly with a retailer, you will incur a currency conversion fee, usually ranging from 1% to 3% of the purchase amount.
What To Do if Your Debit Card Is Stolen
If you notice fraudulent transactions on your account, act fast. Responding quickly is extremely important to limit your liability for unauthorized charges. Here are the steps you should take:
- Report the Loss or Theft of Your Card — Call your card issuer using the number listed on the back of your card to report the issue. Once you report the loss of your ATM or debit card, federal law says you cannot be held liable for unauthorized transfers that occur after that point.
- Change Your Account Passwords — If it’s not clear how your information was obtained, make sure you change your password to your lender’s website and PIN just to be safe.
- Follow up With a Letter or Email — The Federal Trade Commission (or FTC) recommends this as an added precaution. Be sure to include your account number, the date and time when you noticed your card was missing, and when you first reported the loss.
- Continue to Monitor Your Accounts — Transactions can take a few days to post to debit cards, so it is important to continue monitoring your accounts. Report any additional unauthorized transactions to the card issuer as quickly as possible.
How Debit Card Fraud Is Handled
The Electronic Fund Transfer Act (EFTA) protects consumers in a number of instances when you use your debit card or withdraw money from an ATM. The EFTA can help protect you from errors and limit your liability if your card is lost or stolen.
According to the EFTA, if you report your debit card missing before any unauthorized charges are made, you’re not responsible for any unauthorized transactions. If you report it lost or stolen within 2 business days of learning about the loss or theft, your maximum financial loss is the lesser of $50 or the total amount of unauthorized transfers.
If you report it within 60 days, you can be liable for $500 or more. Wait more than 60 days and you have zero protection.
Hot Tip: If your card is still in your possession, the 60-day clock starts from the date of the statement on which a fraudulent transaction appears.
Regardless of your liability, fraudulent charges can cause huge headaches by tying up your funds causing legitimate charges to be declined or overdraft fees to be incurred.
As soon as you suspect fraud, immediately contact your bank or credit union — this is the best way to alert them to a problem and limit your liability for fraudulent purchases. Keep an eye on future statements as well to make sure that you have caught all charges that you don’t recognize.
What It Means When You Use a Debit Card as a Credit Card
You may have been given the option to pick “credit” when you use your debit card. You sign for the purchase like a credit card instead of using your PIN, but what exactly does this do?
To keep it simple, choosing credit won’t make your debit card act like a credit card. You won’t get the benefits of establishing a credit history and you won’t get any additional consumer protections that are typical of credit cards.
Selecting “credit” or “debit” just determines how the merchant processes the card and what fees they will pay for this transaction. It may also impact the processing time. Credit transactions typically take a few days to clear while debit transactions hit your checking account immediately.
If you don’t have currently have enough money in your account to cover the purchase, selecting “credit” sometimes allows the transaction to process instead of being declined.
What Is a Credit Card?
A credit card allows you to borrow money against a line of credit, otherwise known as the card’s credit limit. You use the card to make basic transactions, which are then reflected on your bill.
Types of Credit Cards
There are 2 main types of credit cards: secured cards and unsecured cards.
Secured credit cards require you to pay an upfront security deposit, which serves as collateral if you miss a payment. These cards are typically available to those with poor credit history and offer the chance to build back creditworthiness.
Unsecured credit cards don’t require a security deposit when you apply and usually offer better terms. These are available to consumers with higher credit scores.
How To Apply
To be considered for a credit card, you’ll need to fill out a credit card application through a bank, credit union, or another card issuer. The company will review the application and check your credit reports.
Bottom Line: At a high level, your credit report and score help the lender determine the likelihood that you’ll repay what you borrow.
You may be approved instantly, or it may take a few days to hear back. If your application was rejected, be sure to check out our article on credit reconsideration and what to do next.
Important Information To Look For
If you’re approved for a credit card, you’ll sign an agreement that obligates you to pay back any money that you borrow. In addition, the agreement will list important information like annual interest rate, credit limit, balance transfer interest rate, and all other fees associated with the card.
You will also be given a credit limit, which is the maximum amount you can borrow at any time. For secured cards, the credit limit is usually the amount of your security deposit. On an unsecured card, the issuer will base your credit line on your income, credit scores, and other factors.
Your interest rate is the price you pay for borrowing money, usually noted as an annual percentage rate, or APR. If you don’t repay the loan in full each month, you’ll have to start paying interest at this rate on all of the money you carry on your account from month to month.
Using Your Card
Each time you want to make a purchase, you will have to swipe, tap, or insert your card. Some places even have the functionality to tap your phone if your credit card information has already been saved there. Generally, you must sign on to approve these purchases, although exceptions may be at the gas pump or for other small purchases.
As you use a credit card to make purchases at stores and online throughout the month, the money you spend gets added to your card’s balance. Your card’s credit limit could determine how high your balance can be at any given time, so you’ll want to pay attention to how much you’re charging to your card.
One of the main factors to your score is credit usage — also known as how much of your credit limit you are currently using. Get too close to your credit limit and that could mean bad news for your credit score. It might even be good to make an extra payment between due dates to lower your overall credit usage.
How Do I Pay My Bill?
At the end of each billing cycle, your card issuer will send you a statement that lists your credit card account balance, statement balance, the individual transactions you made that month, the minimum payment due, and the due date.
Most credit cards give you an interest-free grace period on purchases. The grace period, which is usually at least 21 days long, is the time between the end of your billing cycle and your bill’s due date. This isn’t always the case, though, so be sure to check all of the fine print when you receive a card.
This can be a little confusing, so here’s an example. Let’s say you make a $100 purchase with your card on January 1, the billing cycle closes on January 24, and your payment due date is February 21. The time between the end of the billing cycle (January 24) and the due date (February 21) would be your grace period. During this time, you won’t accrue any interest if this purchase is paid off in full by the due date.
You’ll need to pay at least part of the balance due, called the minimum payment, each billing cycle. Note that this is the minimum payment — you should always strive to pay off the entire statement balance by the due date to avoid paying interest on your purchases.
Hot Tip: Interest rates on credit cards can be astonishingly high. Avoid paying these finance charges altogether by paying off your statement balance in full each month.
If you only make the minimum payment, you’ll be charged interest on any remaining statement balance at the rate set when you were approved for the card. This can also be called “carrying a balance” on your card as you have a balance from 1 billing period to the next.
This is where many individuals can get into trouble. Those fees start adding up over time and can begin to snowball into a much larger problem.
Pros of a Credit Card
Credit cards offer many advantages that cash and debit cards don’t have.
- Build Credit History — Whether you’re using a secured or unsecured credit card, each card allows you to build your credit. Length of credit history, positive payment history, and low credit utilization are all key components in building and increasing your credit score.
- Manage Fraud Easier — The Fair Credit Billing Act (FCBA) limits your liability to $50 for unauthorized charges. Some credit card companies have $0 liability policies if your card is lost or stolen.
- Earn Rewards — Rewards cards let you earn rewards or cash-back on purchases you’d be making anyway. Many cards come with sign-up bonuses of either cash or rewards as well.
- Take Advantage of Free Short-Term Financing — You are basically given a free month-long loan if you pay your bill in full. In addition, you can use a credit card to pay for emergencies, even if you don’t have the cash on hand.
- Travel Without Worry — Credit cards provide more flexibility when booking a hotel or renting a car. Rewards cards many come with additional travel benefits like lounge access, travel insurance, and zero foreign transaction fees.
- Get Additional Benefits — Some cards offer additional benefits like purchase protection, extended warranties, or concierge services to book tickets to special events.
Cons of a Credit Card
While there are many benefits to using credit cards, there are some downsides, too.
- Credit Card Debt — If you’re not careful, you could rack up significant debt since you can spend more than you currently have in your bank account.
- Interest Adds Up — If you don’t pay your balance in full and on time at the end of each billing cycle, you’ll be charged interest on the purchases you made.
- Additional Fees — Common fees you can be charged include late and/or return payment, balance transfer, cash advance, and foreign transaction fees. These can all add up over time if you’re not careful.
- Not Easy To Take Out Cash — Many banks now charge a fee of around 5% when you use your credit card to take out cash at an ATM or at a bank as this is considered a cash advance. It is much better to use your debit card in these instances and to ensure you have a checking account that doesn’t charge international fees.
Common Credit Card Fees
Since we just talked about fees adding up, let’s dive into each of the main fees that credit cards typically have. These are all listed within what is referred to as the “Schumer Box” on your card information.
This is a fee you pay annually for the privilege of carrying a credit card. Annual fees are common on travel reward credit cards, which tend to offer higher signup bonuses and bigger rewards than other credit cards. Many cardholders are adamantly opposed to paying fees of any type, but we’ll argue that this fee might actually be worth it.
To decide whether a card is a good investment, you’ll have to do the math. Based on your spending, would you earn enough rewards each year for the fee to make sense? In addition, do those other perks like travel credits and lounge access outweigh the annual fee?
For example, we’ve written about whether The Platinum Card® from American Express is worth the large annual fee or the Chase Sapphire Preferred® Card which is at $95 per year.
A finance charge is a completely avoidable fee. A finance charge is just the interest that accrues on the balance you carry on your credit card. If you pay your balance in full each month, you’ll never pay a penny in interest.
There are a few ways that interest fees can be charged, but “daily average balance” is the primary one. Credit card companies will average your balance for every day of the month, then multiply that by the daily rate and the number of days in the billing cycle to determine your interest owed.
Please refer to our complete guide on credit card interest for an in-depth look at this.
Balance Transfer Fee
A balance transfer fee is charged when you move debt from 1 credit card to another. After that, the typical fee is 3% to 5% of the amount transferred. Depending on the circumstances, some cards don’t charge a fee for balance transfers. To verify, you will have to check the terms specific to your card.
Many cards offer an introductory rate of 0% interest on balance transfers for a year or more, but you have to decide whether the interest savings will make up for the transfer fee.
Cash Advance Fee
When you use your credit card to take out cash (at an ATM or bank), you will be charged a cash advance fee of 2% to 5% of the amount borrowed. It’s much better to use a debit card (if you have one) to take out cash.
While one of the benefits of having a credit card is the ability to cover emergencies, this can also lead to problems if you aren’t able to repay this debt in a timely manner.
Foreign Transaction Fee
This fee is a charge of 1% to 3% added onto purchases made outside the U.S. While many cards charge this fee, most travel credit cards do not. If you are a frequent international traveler, having a card without this fee is very important.
Late Payment Fee
A late payment fee is charged when you don’t make at least the minimum payment by the due date. The exact amount varies by card. Some credit cards don’t charge late fees, but if you’re more than 30 days late, it can still hurt your credit score.
Hot Tip: The late payment fee can be easily avoided by enrolling your account in auto-pay.
An over-limit fee is different from the overdraft fee that we discussed earlier for debit cards. You can’t overdraft a credit card unless you’ve specifically opted in for “over-the-limit coverage” with your card issuer.
The first time you go over your limit, you can usually be charged a fee of up to $25. After that, the fee can go up to $35 if you go over your limit a second time within 6 months.
Paying for this fee may help you avoid the embarrassment of transactions being rejected at the register. If you don’t opt-in for this fee, your purchase would simply be declined.
Returned Payment Fee
A returned payment fee is charged when an automatic payment out of your bank account or a check you’ve made out is blocked for insufficient funds. This fee will vary by card, but around $35 is common.
This is another fee that can be easily avoided by ensuring you have the money in your account before writing that check or your auto-pay date.
Be sure to also check out our definitive guide to credit card fees and how to avoid them.
What To Do if Your Credit Card Is Stolen
You may have been issued a new card in the past few years that contains an EMV chip embedded on the face of your credit card. This chip’s processing method makes your transactions more secure and may help to reduce credit card fraud. Unfortunately, EMV chips haven’t completely eliminated credit card fraud.
So, what do you do if you find unauthorized charges on your credit card statement?
- Call Your Credit Card Company — As soon as you notice charges you don’t recognize, call your credit card company using the number on the back of your card. They’ll likely but a stop on your current card, issue you a new card with a new card number and investigate the charges immediately.
- Change Your Account Passwords — If it’s not clear how your information was obtained, make sure you change your password to your lender’s website just to be safe.
- Notify the Credit Bureaus — If you notice unauthorized charges on more than 1 card or account, be sure to contact the major credit bureaus (Equifax, Experian, and TransUnion) to alert them and request a credit freeze. This can help stop any more accounts from being opened under your name.
- Contact the Federal Trade Commission (If Necessary) — If you have encountered fraud on more than 1 account, it could be considered identity theft. This should also be reported to the Federal Trade Commission. It can assist you in developing a plan to prevent further issues.
- Call the Police (If Necessary) — If you notice a pattern of credit card fraud, the police can use your records to open an investigation.
- Monitor Your Statements and Credit Reports — You should keep monitoring your credit card statements for a few months as fraudulent charges can appear for months after the initial occurrence. Your credit report can show if any new fraudulent accounts have been opened under your name.
- Check Your Online Shopping Sites — Most of us store credit card information with our favorite online shopping stores. It might be a good idea to remove this information or, at the minimum, change your passwords to these websites.
How Credit Card Fraud Is Handled
Under the FCBA, your maximum liability for fraudulent credit card transactions is $50. If you report your card lost or stolen before any fraudulent transactions occur, your liability is zero. Many credit cards go 1 step further and promise zero liability for all fraudulent transactions.
There is the potential for these zero-liability policies to be voided in cases of cardholder carelessness (for example, you leave your credit card on a counter), but federal law will still offer you protection regardless.
After you report an unauthorized purchase to your credit card issuer, the charge will be removed from your outstanding balance while it is investigated.
The important thing is that you have lost no money when a fraudulent transaction occurs on your credit card. You won’t have to make a payment for this transaction, so it will never affect your bank account. This is the primary area where debit and credit card protections vary.
A Real-Life Example of Debit vs. Credit
Each customer purchases the same item from a local store for $100. One uses a standard debit card, and the other uses a credit card.
The debit card customer swipes their card, and their bank immediately places a $100 hold on his account, preventing them from spending it on something else. Over the next few days, the store sends the transaction details to the bank, which electronically transfers the funds to the store.
The second customer uses a traditional credit card. When they swipe their card, the credit card company automatically adds the $100 purchase price to the customer’s outstanding balance. The customer has until the next billing due date to reimburse the credit card company by paying the entire $100. If they only reimburse a portion of this payment (aka minimum payment), interest fees will be added to the unpaid portion until the entire amount is paid off.
Which Option Is Best?
The type of card that’s best for you will vary depending on your spending habits and how you plan to use it. As a quick recap, when considering whether to use a credit or debit card:
- Consider using credit cards for hotel reservations and car rentals.
- For daily purchases, your debit card can help you stick to your budget.
- If you are going to take advantage of rewards on your credit card, be sure to pay off the balance in full each month.
If you think you have a history of overspending, then a debit card is probably a better choice. If you’re comfortable paying off your balance in full every month, then a credit card might be a better option as you can build credit and earn rewards. However, if you do not make timely payments, any rewards you earn will be offset by the additional interest expenses you will face.
Keep in mind that individuals can have more than 1 card, so you might choose to use a debit card for everyday purchases and keep a credit card on hand for emergencies.
Different credit cards earn different rewards as well, so some extremely organized people can take advantage of using multiple credit cards at once to maximize their rewards.
Protecting Your Credit
We’ve mentioned a few times that your credit is important, but what does this really mean and why should you care?
Credit Score Basics
At a high level, your credit score is a 3-digit number lenders use to help lenders decide how likely it is they’ll be repaid on time if they grant you a credit card or loan — this is an important factor in your financial life.
The higher your scores, the more likely you are to qualify for loans and credit cards at the most favorable terms, which will save you money in the long run. If you have good credit, you can also be approved for cards that have better rewards and benefits.
If you have low credit, you may have difficulty finding a lender that is willing to loan money to you, or the rates they offer you might not be as good by comparison. This can cost you big bucks over the lifetime of your loan.
The most important factors in developing your credit score are payment history and credit usage. While making regular timely payments boosts your score, missing multiple payments can drop it. If you have a credit limit of $5,000 and you are always near or at the maximum, this can also hurt your score. On the other end, having lower credit usage will help increase it.
So how do you know what your score is? Everyone is entitled to 1 free credit report every year from each of the 3 big credit bureaus: Equifax, Experian, and TransUnion. You can get this report by going to annualcreditreport.com.
Hot Tip: There are also other websites, some free and others not, that offer access to your scores as well. Here, we have a complete guide on the best ways to monitor your credit score.
Other Types of Cards
There are a few other common types of cards that are regularly used to make purchases that we’d like to touch on briefly.
An ATM card is a bank card used to access an ATM. Virtually everyone who has a checking account also has a card that can be used at an ATM, in the form of a debit or credit card, which we’ve discussed earlier. However, some banks also issue ATM-only cards, which can’t be used at retailers for making purchases.
Bottom Line: ATM cards should not be confused with the debit cards we’ve talked about in detail above. You can easily tell the difference since there is not a Visa or Mastercard logo on the card.
Unlike a traditional debit card, prepaid cards can be issued by large credit card issuers (like Visa and Mastercard), but aren’t linked to your checking account. Instead, you load money onto them and use them to make purchases until the balance hits zero.
They allow the convenience of paying with a credit card but don’t have the negative side-effects of potential overdrafts, interest fees, or a credit check.
You will need to monitor the amount on your card closely to avoid declined purchases.
When paying for groceries, the customer’s Supplemental Nutrition Assistance Program (SNAP) Electronic Benefit Transfer (EBT) card is run the same way as a credit/debit card would be. The recipient enters the secret PIN in order to debit the account for the amount of the purchase, and the retailer’s account is credited. No cash money changes hands.
Ultimately, whether you choose a debit card or credit card (or both) should be the type you’re most comfortable with based on the cash you have available and how you prefer to manage your finances.
We hope we’ve been able to provide the pros and cons of each card so that you can make an informed decision about which option is best for you.