Close text version
How they work
Credit card
- You borrow money from a lending institution and pay back some or all of it each month.
- When your card is swiped, the credit card company pays the vendor for the purchase.
Access to funds
You have a limit on how much you can borrow, typically based on your credit history.
Debit card
- It takes money directly from your checking account.
- When your card is swiped, the funds are transferred from your account.
Access to funds
You can access only as much money as is available in your account or face potential fees.
Pros
Credit card
- Build credit history: On-time payments could help your credit score.
- Rewards: Many cards offer frequent flyer miles, cash back or gift cards.
Spending advantages
Make a purchase even if you don’t have cash on hand or in your account.
Debit card
- Access to cash: Not only at ATMs, but you can often get cash back at point of sale.
- No interest charges.
- Worry less about how spending will affect your credit score.
Spending advantage
Can help curb overspending since limits are more concrete and you can likely track activity.
Cons
Credit card
- High interest: Average fixed-rate APR for credit cards is 13%.
Fees
Many charge for things such as exceeding credit limits and making late payments.
Spending disadvantage
Can be easy to go over budget.
Debit card
- Does not build credit history or improve credit score.
Fees
Overdraft: You may be able to withdraw more than what’s in your account but you’re likely to be charged fees.
Spending disadvantage
A transaction could be declined if you try to spend more than you have in your account.
Safety and security
Credit card
- Since funds aren’t withdrawn immediately, you may be protected from fraud or theft.
Liability if lost or stolen
- $50 maximum liability for unauthorized purchases.
- You must report the theft/loss in a timely manner to dispute unauthorized charges.
Reimbursement
May be reimbursed for goods that are damaged in transit.
- Some offer insurance or warranties on purchases.
Debit card
- May require a Personal Identification Number (PIN) to authorize purchases.
Liability if lost or stolen
- $50 maximum if you notify the bank within two days of learning the card is missing. After that, liability may increase to as much as $500.
- Notice must be given within 60 days of receiving your account statement to avoid liability for subsequent transactions.
- It could take days or even weeks for fraudulent withdrawals to be reimbursed.
Reimbursement
If goods are damaged you likely need to deal with the merchant.
Both credit and debit cards are important parts of your financial life. Knowing when and how to use each of them may help you build a stronger credit history while keeping your debt levels down.
