Debit cards are linked to a checking or savings account. That means the amount you can spend with your debit card is tied to the actual amount of cash you have in the bank. Paying with a debit card is virtually the same as paying in cash.
Credit cards are linked to a line of credit extended to you by a bank, so whenever you make a purchase with your credit card you’re essentially borrowing money that needs to be paid back. It’s called revolving credit in that it replenishes when you make payments toward the balance.
Fees and charges
Credit card holders may incur a fee when they exceed their credit limit, make a late payment, or use the card in another country. Some cards also charge account holders an annual fee. Traditional debit cards do not have these fees, but some prepaid card services do have activation and usage fees.
If you lose your credit or debit card, you could be protected from unauthorized charges. Under the Fair Credit Billing Act, credit card holders are not liable for unauthorized charges if they report the card as lost before the charges are made, and they are only liable for up to $50 of unauthorized charges after that. This same is true for debit cards if the loss is reported within two days, but if you don’t report your card as stolen for more than two days, you’ll be liable for up to $500, and if you wait 60 days, you’ll be liable for all the charges.
Disputing transactions is a simpler process for consumers using credit cards instead of debit cards. When you dispute a credit card transaction, the bank can immediately stop the payment. When you dispute a debit card transaction, the money remains out of your account until after the bank completes its investigation and makes a decision about the dispute. This can take up to two weeks.
Budgeting and building credit
Since consumers using debit cards cannot spend more than they have available in their account, debit cards help them stay within their budget. At the same time, credit cards can help customers build a credit history, which can lead to better loan rates and other financial incentives in the future. However, neglecting to pay your credit card balance in full each month can cause you to go into debt and negatively impact your credit instead.
Credit cards offer points in return for purchases made using the card, and some rewards programs even multiply your points based on specific purchases, like dining out or using an airline’s co-branded card to book flights. These points can be exchanged for cash back or benefits at certain retailers. Sadly, although debit cards used to offer rewards, virtually none do so today.
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The final word
Paying with plastic is a convenient alternative to cash and checks, but choosing which type of card to use depends on your financial goals and spending habits. For individuals who use them responsibly, credit cards offer stronger fraud protection and better incentives. Yet debit cards remain the simpler way to control spending and stick within your budget.