Credit cards vs debit cards: what is the difference?

It's essential that you understand the difference between credit cards and debit cards so that you can choose the most appropriate card for making purchases or borrowing money. Debit cards and credit cards both give you extra security against fraud and protection if something goes wrong.

You may have wondered what is the difference between a credit card and a debit card. The main difference is that with a credit card, you don't have to repay any of the money you spend until your credit card bill is due. Or you can wait longer and let the credit owed roll over from month to month while incurring interest. 

With a debit card, the money you spend or withdraw from a cash machine comes out of your bank account almost immediately. Here we explain how debit cards and credit cards work and how to use them to your advantage. 

Credit cards vs. debit cards: an introduction

Credit cards let you borrow money when you need to, provide you with better protection than paying by cash or debit card, can give you cashback on your spending, and can be used to pay off credit card debt without paying any interest. Credit cards can be an excellent way to borrow money, but should be used responsibly to avoid getting into debt. 

With a credit card, you can spend and get cash up to your credit limit, and you do not have to pay the money back for up to around 56 days. If you don't want to repay the money, as with an overdraft, interest is charged. Although, to reduce the amount you owe, it’s advised to at least make the minimum payment each month. 

With a debit card, you are only able to spend and withdraw money from your bank account. This typically consists of money you already have, plus the amount of any overdraft facility. If you are financially able to make payments using your own money without borrowing from your overdraft, then using a debit card is a good way to avoid getting into debt, and you won’t need to make any repayments. The overdraft allows you to spend more money than you have in your bank account, but you will need to repay any money spent from this facility, and it will accrue interest like a credit card.

What is the difference between a credit card and a debit card?

In order to choose the right card for spending and getting cash, you need to understand how debit and credit cards work.

How much can you spend?

With a debit card, you can only spend the money that you have in your bank account. However, if you have an overdraft on your bank account, you can also use this to buy things and to get cash with your debit card. An overdraft should be more of a short term way of accessing money, as it’s like a loan you receive from the bank. If you don't have an overdraft set up and you spend more than you have, you will also be charged interest and your credit rating could be affected. This is called an unarranged overdraft.

With a credit card, you can make purchases up to the amount of your credit card limit. However, if you are not able to pay off your credit card bill in full when you get it, you will usually be charged an average interest rate of around 20%. 

As a result, it would cost £200 in interest on a typical credit card to borrow £1,000 for a year. Borrowing the same amount using an arranged overdraft would cost around £300 using a bank overdraft with an average interest rate of 33%.

How are your purchases protected when using a debit or credit card?

It is safer to pay for things with a debit or a credit card rather than paying with cash, a cheque or a bank transfer. When you buy something using a debit card or a credit card, you may be able to get your money back from your bank or credit card using chargeback. Chargeback is a set of rules that Visa, MasterCard and American Express use to run their cards systems. It involves withdrawing funds that were deposited into a retailer’s account, and putting that money back into your account. You could get your money back if something you buy is not delivered, a purchase is not as described or it is faulty. However, chargeback is not a legal right, and is not as powerful as the protection you get on a credit card with  Section 75 of the Consumer Credit Act 1974 (Section 75). 

If you pay for something using a credit card that costs more than £100 and up to £30,000 and there is a problem with the product, you could claim the money back from the seller or credit card company using Section 75. Importantly, this is a legal right, and means that it is always preferable to pay using a credit card if you can for purchases of more than £100. 

Strangely, as long as the purchase is more than £100 and up to £30,000, you can claim the full amount of the purchase that went wrong from the credit card company, even if you only put a smaller amount on the credit card. For example, if you bought a bike that cost £500, and paid £10 on your credit card then the rest in cash, you could claim the full £500 from your credit card company if it fails to get delivered to you, not just the £10 you had paid using your credit card.

When do you pay the money back?

When you spend money using your debit card, the money comes out of your bank account almost straight away. However, with a credit card, you don't have to pay the money back until you get your credit card statement and you could then choose only to pay back a small amount of it if you wanted to,  although you will be charged interest. 

Credit card interest rates

Standard interest rates for credit card purchases are, on average, around 20%. With a balance transfer credit card, you can transfer credit card debt to  another credit card and pay no interest for up to around 28 months. Although you usually have to pay a balance transfer fee of between 1% and 3%. Some balance transfer credit cards do not charge balance transfer fees. If you can, try and repay the money you have borrowed on your credit card before the 0% interest rate comes to an end. You usually are not allowed to transfer a balance from one credit card to another from the same company.

With a money transfer credit card, you take out a new credit card, and instead of paying off existing credit card debt, you can transfer money directly into your bank account. You can then repay the debt and not pay any interest for a year or two, or even longer. You will typically be charged a fee of 3% or 4% of the balance that you borrow using a money transfer credit card. The money transfer fee would be £80 if you borrowed £2,000 with a 4% fee, for example.

How much does it cost to borrow money on each card?

If you have money in your bank account when you buy something or get cash from a cash machine using a debit card, this typically won't cost you anything as you aren't borrowing any money. If you borrow money using your overdraft facility, you will be charged interest. 

When you buy something with a credit card and don't pay it back in full once you receive your credit card statement each month, you will be charged interest. 

With a credit card, you can choose to pay off the minimum repayment, a set amount, or the full balance when you get your credit card bill each month. If you only pay the minimum payment each month, it would take more than 26 years to repay the average credit card debt. The minimum payment is usually calculated as a percentage of the outstanding balance that needs to be repaid, meaning the amount you pay back each month reduces. However, if you repaid the same amount every month instead, the debt would be paid off in just over 5 years, saving a lot of interest and clearing the debt in a fraction of the time. 

Which card is better per transaction type? 

  • If you want to make a large purchase of over £100, a credit card will give you better protection if something goes wrong. If you pay the full balance of the credit card, you will not be charged interest on any purchases.

  • If you need to withdraw cash, a debit card will probably be the cheapest option as you won’t be charged interest unless you are using your overdraft. You usually pay interest on credit card cash withdrawals even if you pay the bill in full when you get it. Watch out for cash machines that charge you for withdrawing cash. 

  • It is generally less expensive to borrow money using a credit card rather than using an overdraft. However, try and pay back the money you borrow on your credit card as quickly as possible to pay as little interest as you can.

  • Retailers are no longer allowed to charge more if you choose to pay by credit card rather than by debit card or cash, although retailers are allowed not to accept credit cards if they want to.

Here is a summary of the main differences between the two card types:

Debit CardsCredit Cards
Amount of borrowing allowedUp to overdraft limitUp to credit card limit
Does chargeback apply on purchases?YesYes
Does Section 75 protection apply on purchases (£100 to £30,000)?NoYes
Interest-free period on purchasesNone Up to 56 days interest free
Average interest rates for borrowingAverage APR 33% on arranged overdraftsAverage APR on credit card purchases 21%

Which card is best for you?

Overall, before buying something or getting cash out of a cash machine, think carefully and choose the right type of card to use. If you need to borrow money, a credit card could be cheaper than an overdraft and could give you better protection if something goes wrong with a purchase. Although you also have similar protection on a debit card. A debit card could help you manage your finances better as the temptation to borrow more than you can afford is removed, compared to a credit card where you can borrow up to your credit card limit.


12th June 2020