Pros and Cons of Debit and Credit Cards

Cheerful young black woman using credit card at home
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Paying with plastic is easy, but it’s important to choose the right type of card. You can use both debit cards and credit cards for almost anything: everyday spending, shopping online, and even paying bills. Consider the pros and cons of each card before you commit to one.

Pros and Cons of Debit Cards

Pros
  • Prevent debt

  • No annual fees

  • Good for smaller purchase

  • Easy to get

Cons
  • Have limited funds

  • Have overdraft fees

  • Complicated for big-ticket items

  • Require a PIN

Debit cards are linked to your checking account. When you use one, money immediately gets taken out of the linked account. These cards come with advantages and disadvantages.

They Prevent Debt, But Funds Run Out

For many, the advantage of debit cards is that you don’t go into debt when using them. They limit spending to what’s available in your checking account. There also won’t be interest charges each month.

However, when you run out of money, the card will be declined unless you opt into an overdraft protection system, in which case the bank will pay for the transaction. If you don't and have an unplanned expense, you may not have enough money in your account at the time to make a purchase.

They Have no Annual Fees But Incur Other Fees

Using debit cards is also inexpensive. They often do not charge the annual fees that some credit cards do. In addition, many banks offer free checking with no maintenance fees. As an added benefit, if you need cash from an ATM, you can generally get it for free using your debit card at ATMs affiliated with your bank. However, using other banks' ATMs may incur ATM fees.

Some checking accounts (which you’ll need for a standard debit card) charge maintenance fees if you don’t qualify for a waiver, but a checking account is practically a necessity. A credit card is not. Also, if you sign up for overdraft protection, you will incur overdraft fees. If you have a hard time controlling your spending, you could wrack up a considerable amount of overdraft fees.

They're Good for Small Purchases But Complicate Big Ones

Merchants pay fees to process your payments, and debit card swipe fees are typically much lower than credit card fees (although there are exceptions). As a result, some merchants require you to meet minimum purchase thresholds when you use a credit card, like a $10 minimum, for example. In contrast, you can often avoid swipe fees when you use a debit card, keeping your favorite businesses' costs low.

But one of the cons of debit cards is that if you make a large purchase, you're forced to spend immediately, as the funds immediately get taken out of the account. Credit card expenditures are loans, so you don't have to pay back what you borrowed right away. This makes it easier to manage large purchases.

They're Easy to Get But Require a PIN

Debit cards are easier to get if you have bad (or no) credit. If you can get a checking account, you can get a debit card. You don't have to apply for it separately like a credit card.

In contrast, you have to apply for a credit card separately, and some cards are limited to people with high credit scores. If you get a card from a bank other than where you do your banking, it also won't be linked to a bank account, which introduces more complexity to your finances. You'll often have one more username and password, another card number that can get stolen, and an extra payment you need to stay on top of each month.

However, one of the cons of debit cards is that they make spending slightly less convenient for the consumer. Unlike with a credit card, you can't simply swipe a debit card; you also have to enter a personal identification number (PIN) to prevent others from stealing your card and misusing it.

In some cases, you may have the option to use a debit card like a credit card, which would allow you to avoid entering a PIN.

Pros and Cons of Credit Cards

Pros
  • You have time to notice errors

  • Can build credit

  • Offer rewards

  • Have high limits

Cons
  • Can lose up to $50 to fraud

  • Can hurt credit

  • Potential for overspending

Credit cards allow you to borrow money from a financial services company to pay for items or services. When you use one, the card issuer pays the recipient on your behalf, and you later repay the card issuer. While these cards are convenient, they are not without their downsides.

They Are Less Risky, But Losses Occur

With a credit card, you have time between when you make the purchase and when your payment is due. That gives you more time to notice errors and dispute them while keeping your checking account intact. When you (or thieves with your card and PIN) use a debit card, the money immediately comes out of your checking account.

Credit cards also offer protection against fraud. That said, today, most debit cards offer voluntary “zero liability” coverage. In addition, you can still lose money (albeit a small amount) with credit cards. With credit cards, you can’t lose more than $50 to fraud, but with debit cards, your liability is potentially unlimited under federal law.

They Can Build Credit or Hurt It

Keeping a credit card account open helps you build a strong credit history or keep your credit in good shape. Debit cards do not affect your credit. Some die-hard debit card users may say they don’t care about credit scores because they’ll never need to borrow, but those scores are important. You might want to borrow someday (to buy a home or automobile, for example), and starting from scratch is hard.

You won’t pay any interest charges if you pay off your credit card balances in full every month. However, if you fall behind on payments, your credit score could drop, which generally isn't a possibility with debit cards.

They Offer Rewards, But Debit Has Its Perks

If you're incentivized by bonuses, credit cards on the whole offer better rewards than debit cards in the form of sign-up bonuses, discounts, cashback, and travel points. Some credit cards even offer extended warranties on items you purchase as well as limited travel insurance.

While the average debit card doesn't offer such rewards, a small subset of debit cards linked to "rewards" checking accounts offer some of these benefits. For example, there are multiple cashback debit cards on the market.

Some rewards debit cards carry fees or impose spending restrictions that may outweigh the rewards, so read the fine print.

They Have High Limits But Promote Overspending

Credit cards often come with limits that are greater than the amount of cash you keep in checking. As a result, you don’t have to worry about hitting your limit due to authorizations and holds. You’ll have fewer problems using your card for rental cars, hotels, gas at the pump, and dining, all of which have pre-authorization holds that lock up funds for several days.

If you have trouble budgeting, you can easily max out your credit limit, sending you further into debt and hurting your credit score. In contrast, you can only spend money you have with a debit card, so it can curb the impulse to spend.

When Should I Use Credit Instead of Debit?

A credit card is best for many purchases. When you shop online or in person, a credit card protects you in several ways that a debit card can’t (including sheltering your checking account, extended warranties, and more). The key is to pay off the card’s balance completely every month to avoid finance charges.

A debit card is better for cash withdrawals and helps to avoid overspending and debt. For cash withdrawals at ATMs, your debit card is the best option. You’ll keep fees at a minimum, and your card information is unlikely to get stolen if you stick to safe ATMs.

If a credit card will tempt you to take on a mountain of debt, stick with a debit card. But, ultimately, you need to take charge of your spending. If you don’t do that, you’ll find ways to spend more than you should, regardless of what’s in your wallet.

Spending With Debit and Credit Cards
Reasons to Use Debit Reasons to Use Credit
Stay out of debt
Avoid annual fees
Avoid credit scrutiny
Simplify finances
Make ATM withdrawals  
Complete everyday purchases without a PIN
Build credit
Pay after a grace period
Spend at higher limits
Receive robust fraud protection
Qualify for rewards

Prepaid Debit Cards

If you can’t decide between the two cards, consider an intermediate option: a prepaid debit card.

Unlike traditional debit cards, prepaid debit cards aren't linked to a checking account. Instead, you load money onto the card, and when you use it, the funds get withdrawn from the card. Like debit cards, prepaid cards prevent you from going into debt because you can only spend funds that you’ve loaded on the card. Once that money is used up, the card stops working.

Like credit cards, prepaid debit cards keep your primary checking account from being exposed to the world. If there’s an error or someone steals your card number, the only money available is money you’ve loaded on the card. However, you’ll be unable to spend those funds (which you might need), and getting the funds replaced may be a slow and difficult process. Still, prepaid debit cards offer many of the advantages of debit cards and credit cards, which makes them a good option for those who want the benefits of both.

Frequently Asked Questions (FAQs)

How can I tell the difference between a debit card and a credit card?

It's difficult to tell the difference between a debit card and a credit card by looking at a card. They both have card numbers, expiration dates, and a card security code. If you're unsure whether a card is a debit or credit card, contact the card issuer for more information.

Are the fees the same for using credit cards vs. debit cards?

Credit cards may have annual fees. They also have late payment and over-the-limit fees. Debit cards typically don't have annual fees. They do have the fees associated with your checking account, such as overdraft fees and monthly maintenance fees.

What do debit and credit mean in accounting terms?

If a business account is tied to assets, dividends, and expenses, a debit is money moving into an account, and a credit is money moving out of an account. If the account is tied to equity, revenue, or liabilities, a debit is moving money out of the account, and a credit is moving money into the account.