Fundamental Differences Between Credit and Debit Cards

4 Min Read | Last updated: August 15, 2023

Two men seated at a table, engaged with a laptop, discussing the differences between credit and debit cards.

This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

Know the differences between debit and credit cards, Explore the benefits and risks associated with each option to determine which is best suited for you.

At-A-Glance

  • The differences between debit and credit cards are significant.
  • Credit cards offer many benefits—that come with financial risk.
  • Debit cards are the lower-cost way to get cash.

“Credit or debit?” It’s a question we’ve heard so many times, we might take the differences between the two for granted. They look the same, feel the same, and they’re both convenient ways to pay at the point of retail sale. But there are a number of fundamental differences between debit and credit cards—and they can be critically important to understand.

 

At the most basic level, debit cards and credit cards pull funds from different sources. But there’s a lot more to it than that. Specifically, credit cards offer numerous benefits and perks that debit cards don’t. But these benefits come with a potentially serious financial risk: debt.

Debit Cards are Like Instant Checks, Credit Cards are Like Mini Loans

When you use a debit card, funds are immediately withdrawn from your bank account, as if it were an instant check. This means you usually can’t spend more money than what’s in your account, unless you opt-in to an overdraft program which often charges a fee but allows your account balance to dip into negative territory.1 You can also use your debit card to withdraw cash from an ATM, either for free or at a nominal fee.

 

Credit cards, on the other hand, are like mini loans that you can use over and over again—as long as you pay them back quickly enough and spend within your credit limit. Credit card processing is more complex than payment with a debit card. When you pay by credit card, your card issuer pays the vendor, then you repay your card company. If you don’t pay your entire balance each month, you’ll usually pay interest on whatever amount remains (and interest can add up—fast). You can also use your credit card to get cash, but you’ll still have to pay the card company back, often with interest and a fee.2

The Benefits of Choosing a Credit Card

A lot of credit cards boast lucrative rewards (which often come with a higher annual fee), but even the most basic credit cards come with benefits that debit cards don’t. When you’re exploring credit vs. debit cards, here are some reasons you might want to use a credit card:

  • Credit cards can help you build your credit. Responsible credit card use, like on-time payments and keeping a low balance, can build your credit score, which may in turn make it easier for you to do things like increase your credit limit, secure lower interest rates, or get a mortgage.
  • They’re safer than debit cards. If your credit card is used fraudulently, it usually affects your card issuer more than you. According to the Fair Credit Billing Act (FCBA), you’ll never have to pay more than $50 in fees if a criminal uses your card3—and many card companies won’t charge card members at all. But if an unauthorized person gets hold of your debit card, whatever purchases they make are taken directly from your bank account. Federal law dictates that you could pay as much as $500 or more, depending on when you report your card as compromised.4
  • You’ll get rewards for purchases you’re already making. For every dollar you spend, you’ll typically get cash back rewards, airline miles, or points in a cardholder loyalty program that you can trade in for goods or cash.
  • Credit cards can have additional perks. Depending on the card, you could benefit from rental car insurance, airport lounge access, concierge services, and even extended warranties on electronics.

Advantages of Choosing Debit Over Credit

Yet, despite the perks of credit cards, there are also many benefits of choosing a debit card, including:

  • There’s no risk of debt since you’re paying straight out of your bank account. So, no interest can accrue, but you may be subject to fees in certain cases.
  • It’s usually cheaper to withdraw cash because there are no cash advance fees, aside from potential ATM provider fees, and you don’t have to reimburse the cash you took out (since it’s your money!).
  • There are no bills to pay, so you’ll never have to worry about missing a payment or paying a late fee.
  • Debit cards are easier to get than a credit card. All you need is a bank account, so there’s no need to apply or worry about being approved.

With More Benefits Comes a Lot More Responsibility

The price you pay for the many benefits of a credit card can be risky. By using a credit card, you’re incurring debt with every purchase. And if you don’t pay your credit card bills on time and in full every month, high interest rates and late fees could send that debt spiraling out of control at a rapid speed.

 

However, if you have good money management skills, treat credit like it’s cash on hand, avoid overspending, pay bills on time, and are financially prepared for emergencies, the rewards could outweigh the risks.5

The Takeaway

Although they might seem like the same thing on the surface, debit and credit cards couldn’t be more different. Debit cards are a fairly innocuous way to make payments using money you already have, whereas credit cards offer some hard-to-resist benefits that come with the financial risk of rising debt. To understand what’s right for you, assess your own needs, spending habits, and financial discipline.

Headshot of Megan Doyle

Megan Doyle is a business technology writer and researcher whose work focuses on financial services and cross-cultural diversity and inclusion.
 
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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