When to use a debit card vs a credit card

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When held in your hand, credit cards and debit cards look almost identical, yet they are different financial products. A credit card allows you to borrow money to make a purchase, whereas a debit card lets you spend money you already have on deposit.

While you might have one of each in your wallet, it’s important to know the differences between credit cards vs. debit cards. Read on for a more in-depth comparison of a debit card vs. a credit card well, as a look at the strengths and weaknesses of each.

Related: Money management and setting your financial goals

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What Is a Credit Card?

A credit card is a payment card that offers access to a revolving line of credit. Credit card issuers rely on the cardholder’s personal guarantee of repayment, and as such, look at a consumer’s credit history when reviewing their application. You can use credit cards to make purchases at merchants that accept payments from a payment network, such as Visa, Mastercard, American Express, or Discover. Additionally, you may use a credit card to take out a cash advance or make a balance transfer.

Credit cards are regulated by laws such as the CARD Act of 2009 and the Fair Credit Billing Act. These offer credit card users greater protections and allow them to dispute unauthorized charges.

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What Is a Debit Card?

A debit card is a method of payment that draws from funds deposited in a bank account. This could be a checking account, a savings account, or a prepaid account held by the card issuer.

Each time a purchase is made, the funds are immediately deducted from the debit card account. Purchases can be declined if the amount being charged exceeds the remaining funds available. Some debit cards offer overdraft protection that can temporarily loan funds, but this usually comes with a fee. In addition to using a debit card to make purchases, you can also take out cash from an ATM or get cash back at a point of sale with a debit card.

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Credit Card vs. Debit Card

There are several differences between credit cards vs. debit cards. First, a credit card draws on a line of credit, which means it’s a loan. You don’t have to make a deposit to use most credit cards, although secured credit cards do require the payment of a refundable security deposit before you can open an account. On the other hand, a debit card draws on existing funds that are on deposit. That’s why a credit card can affect your credit, while a debit card cannot. With a credit card, you have to qualify based on a credit check, but you don’t with a debit card.

Credit cards also can offer rewards for spending, such as cash back, points, or airline miles. In contrast, debit cards rarely offer rewards. Likewise, credit cards will often have cardholder benefits rarely seen on debit cards, such as travel insurance and purchase protection.

Credit cards are also regulated by different laws than debit cards. As such, credit card users enjoy more robust protections against fraud and billing errors than debit card users.

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Debit Card Pros

When considering whether or not to use a debit card, it’s important to consider the advantages and drawbacks.

Debit cards have several advantages over credit cards. First, they are easy to apply for, as there’s no credit check required. You’ll often get a debit card when you open a checking account, and you can simply purchase a prepaid debit card. This is why there are no top fair debit cards like there are top fair credit cards — credit score isn’t a factor.

Additionally, because a debit card has no effect on your credit, it cannot hurt your credit history or credit score no matter how you use it. Because you’re not borrowing money when you use a debit card, you also can’t rack up debt and you won’t have to pay interest.

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Debit Card Cons

Debit cards do have a few drawbacks. First, you have to deposit money before you can make purchases with a debit card. Debit cards also don’t allow you to borrow money, which means you’re limited to the funds you have in your connected account. There’s also no opportunity to build your credit score when using a debit card.

Additionally, you usually won’t earn rewards for your spending with a debit card. Debit cards rarely offer any significant cardholder benefits, such as purchase protection or travel insurance.

Compared to credit cards, debit cards also have more limited protections against fraud. Debit cards also can impose monthly fees, transaction fees, and other charges.

Image Credit: DepositPhotos.com.

Credit Card Pros

Credit cards also have several advantages and drawbacks that are important to understand.

With a credit card, you don’t need to make a deposit before you can make purchases. (The only exception is a secured credit card, which may be appropriate for someone with a limited or poor credit history to improve their track record). Instead, you’ll be borrowing money based on your determined credit limit. You can enjoy an interest-free grace period when you pay your statement balance in full.

Credit cards can also offer rewards, such as cash back, points, or miles. They may also offer valuable benefits like purchase protection and travel insurance. While there are fees to look out for with credit cards, there are many no-fee credit cards that don’t have an annual fee. And when used responsibly, a credit card can help you to build your credit history and increase your credit score. Lastly, due to credit card regulations, credit card holders will enjoy stronger protections. If your card is lost or stolen, you may not be liable for charges.

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Credit Card Cons

Depending on how they’re used, credit cards can also have significant drawbacks. Opening a credit card account requires filling out an application and having your credit checked, which can temporarily lower your credit score. When not managed responsibly, a credit card can be used to incur debt, which can hurt your credit score. Further, credit cards charge interest rates that can be higher than other forms of loans if you don’t pay off your balance in full at the end of a billing cycle.

Credit cards can also impose numerous fees. This includes annual fees, late fees, balance transfer fees, cash advance fees, and foreign transaction fees.

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Using a Credit Card vs. Debit Card

Whether you should use a credit card vs. a debit card depends on your unique financial needs. Many people have both a debit card and at least one credit card in their wallet, so it’s not necessarily an either-or situation.

A credit card is a great option for those who avoid paying interest by paying their statement balance in full. When you do that, you can earn valuable rewards like cash back, travel points, or airline miles (though keep in mind the best rewards are typically reserved for the top good credit cards). And when you have a credit card co-branded with an airline, hotel, or retailer, you’ll enjoy perks when traveling or making a purchase with the co-branded partner. Perhaps most importantly, when you can make your payments on-time and carry very little debt (ideally less than 30% of your total available credit), a credit card will add to your positive credit history and increase your credit score.

On the other hand, debit cards can be useful for certain types of users. Those who have little or no credit history, or who have had serious credit problems, won’t experience issues getting a debit card like they may applying for a credit card. (Though there are also a number of top credit-building cards on the market.)

Using a debit card also is a great way to avoid interest charges and make sure that you never incur debt. Furthermore, many people don’t need the purchase protection and travel insurance benefits offered by credit cards, and are happy to use a simple form of payment.

Image Credit: DepositPhotos.com.

Can I Use a Credit Card as a Debit Card?

There are significant differences between debit cards and credit cards, but it is possible to use a credit card like a debit card. So long as you pay your entire statement balance in full, you won’t incur interest charges. In this way, using a credit card will be similar to a debit card.

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Is a Credit Card Safer Than a Debit Card?

Due to regulations, credit card holders do generally have stronger protections than debit card holders do.

Credit cards are protected by the Fair Credit Billing Act, which limits your liability to $50 in the event of fraud or billing errors. Yet in practice, many top credit cards offer $0 liability policies that waive the $50 limit.

Thus, if you notice an erroneous or fraudulent charge on your credit card statement, you can easily dispute it before you’ve suffered any financial loss. But with a debit card, a fraudulent or erroneous transaction will immediately result in a loss of funds, and the burden of proof is on you to fight the biller and get your money back.

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Debit Card Fraud

Like any form of payment, debit card and credit cards can both be vulnerable to fraud.

Debit fraud can take many forms, including debit card skimming devices that capture your card’s data. Also, your account number can be obtained by criminals or hackers, or the card itself can be stolen. You can also be the victim of a data breach at your bank or at a merchant that accepted your card.

Protections from debit card fraud are regulated by the Electronic Fund Transfer Act (EFTA), which protects you when you report your card lost or stolen before someone uses it. If you report your debit card was stolen or lost after it’s used, you’re limited to up to $50 in losses if reported within two days, and up to $500 of losses if reported within 60 days. If you wait more than 60 days to report, you could be responsible for all of the funds taken.

Image Credit: DepositPhotos.com.

Credit Card Fraud

As with debit card fraud, credit cards are vulnerable to skimming, hacking, and simple theft of the card, among other credit card scams.

However, credit card transactions are protected by the Fair Credit Billing Act. This limits your liability to $50 if there is fraud or a billing error. Further, many major payment networks offer a $0 liability policy, which means you may not end up being responsible for any losses.

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Applying for a Debit Card

The application process for debit cards and credit cards is quite different. Here’s an overview of how you’d get a debit vs. credit card.

To get a debit card, one option is to open a bank account. This requires providing information to verify your identity, including:

  • A valid driver’s license
  • Your Social Security number
  • Proof of address

Once your account is opened, you may receive a debit card. If you don’t, you can call customer service or go online to request a debit card.

Another option is to simply purchase a prepaid debit card, sometimes called a gift card, without any application or even supplying your name.

Image Credit: fizkes/istockphoto.

Applying for a Credit Card

When you apply for a credit card, the card issuer will need much more personally identifying information as well as details on your employment and income. Specifically, they may ask for the following:

  • Name, phone number, and address
  • Social Security number
  • Employment status
  • Gross annual income and proof of income
  • Financial assets and accounts
  • Financial liabilities

Among other credit card requirements, you’ll also have to give the card issuer permission to check your credit history and credit score. This can temporarily lower your credit score by a few points.

Image Credit: BartekSzewczyk.

Compare Credit Cards With Lantern

As you can see, there are key differences between a credit card vs. debit card. While a credit card allows you to borrow funds, a debit card gives you access to money you already have either on deposit or loaded onto the card. You don’t necessarily have to choose between a debit card vs. credit card either, because both have financial utility.

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This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.

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