Credit Cards vs Debit Cards
Credit Cards vs Debit Cards
While both offer an easy and convenient way to pay for purchases, there’s a big difference between Debit and Credit Cards. One works with the money you already have, whereas the other uses borrowed funds which you then pay back later. But which is which? And, more importantly, how do you pick the right Card for your spending needs?
What’s the difference between a Credit Card and a Debit Card?
When you spend on your Debit Card, you’re using your own money, which is taken automatically from your current account. This means you usually can’t spend more money than you already have.
A Credit Card, on the other hand, is completely separate from your current account. When you buy something with a Credit Card, you are essentially borrowing money to make the purchase and this amount will need to be paid back later. Your Credit Card issuer pays the vendor, then you repay the Card company.
This allows you to spend, even when you may not have the funds readily available. You can choose to pay off the full balance of your spending each month or repay it over time. You will be charged interest if you do not pay the balance in full each month. So, if you need to make a larger purchase, a Credit Card could be a more convenient option.
How does a Debit Card differ from a Credit Card?
There are several differences between Credit Cards and Debit Cards you should know about. Let’s take a look at the key features of Credit Cards vs. Debit Cards:
Debit Cards:
- Use money you already have, so there’s little to no risk of getting into debt, unless you go into overdraft.
- Mostly do not charge a fee for use, though some may have a monthly maintenance fee.
- Allow you to withdraw cash from an ATM for free, depending who you bank with.
- Have no effect on your credit score, unless used with an accompanying overdraft.
- Don’t tend to offer rewards, such as air miles, cashback or points.
- Are available to most people, regardless of credit status.
Credit Cards:
- Offer you a line of credit, where you’re advanced credit by the provider to be paid off monthly, either in full or in part. Interest charges apply when not paid in full.
- Spending isn’t limited by the size of your bank account, but rather, by the Credit Limit you qualify for.
- Generally, come with greater protection than most Debit Cards. Some Credit Cards offer fraud protection, Card Purchase Cover, and sometimes insurance cover (travel insurance, for example).
- Often offer rewards for use.
- Can help build a stronger credit score when used wisely.
- Charge interest on any balance not paid off in full at the end of the billing period, which is usually monthly. Other fees can accrue from improper use, such as over-limit fees and late payment fees.
- Carry the risk of accumulating debt if the balance is not repaid faster than the credit is spent.
- Can negatively affect your credit score if the balance is not paid down each month.
- Are usually unsuitable for cash withdrawals, as a high fee and interest rate may be charged.
Want to learn more about Credit Cards and how to use them right?
How to choose: Credit Card or Debit Card?
A Debit Card offers a straightforward way to spend with little to no risk of debt and often with no fees or monthly payments. Debit Cards work by taking money you already have in your current account. However, you may not reap some advantages enjoyed by Credit Cardholders.
When handled well, choosing a Credit Card from American Express can offer you:
- A wide range of desirable rewards, such as Membership Rewards points (if you hold a points earning Credit Card), and travel benefits.
- Fraud protection.
- Safer spending while abroad.
- More purchasing power to afford bigger purchases and the option to pay them back over time (interest charges will apply).
- A boost to your credit score, when handled correctly.
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