What's the Difference Between Credit and Debit?

Cash is going out of style; only 13 percent of Americans report that they use cash for most purchases. These days, the majority of us reach for payment cards or our smartphone apps. 

The two main types of payment cards are debit cards and credit cards. But what’s the difference between credit and debit? And which might be the right fit for you?

Credit cards explained

Credit cards are payment cards that allow you to spend borrowed money. You must apply for a credit card and get approved, which requires a decent credit score. 

Once approved, you’ll be given a credit limit — $2,000, for example. This means that you can borrow up to $2,000 at a time using the card.

Each time you make a purchase on a credit card, you’re technically borrowing money — and you must then pay that money back, with interest. 

There are also specialty prepaid credit cards, which you can load money onto and spend as needed. This article will focus mostly on standard credit cards. 

Benefits of a credit card

While credit cards do charge interest, there are several benefits to consider:

Increased purchasing power: Credit cards allow you to pay for expenses that you wouldn’t be able to afford upfront with cash or debit. You can then pay the charges off over time. 

Rewards: Many credit cards give rewards for your spending. This is usually in the form of credit card points, airline miles, or cash back. For instance, a card might earn 1 percent cash back — which means a $100 purchase would earn you $1 in rewards. 

Credit building: Responsible credit card use can help you improve your credit score over time. Carrying a balance won’t necessarily help your credit score, but making on-time payments each month will. 

Purchase protection: Some credit cards come with various perks, like purchase protection. This might include reimbursement if an item is damaged or stolen within a certain period, or price protection to refund the difference if the price decreases shortly after buying an item. 

Drawbacks of a credit card

Interest charges: If you carry a balance on a credit card, you’ll pay interest on the money you borrow. Credit card interest rates are quite high — 15 percent to 35 percent or more. 

Annual fees: Some credit cards charge annual fees regardless of how you use the card. 

Eligibility requirements: Not everyone can get a credit card. To be approved for one, you must apply and meet certain requirements. This often means having a good credit score as well as a reliable income.  

Overspending: Because credit cards allow you to spend borrowed money, it can be tempting to overspend. 

Effects on credit score: Using a credit card will influence your credit score. With responsible use and on-time payments, this can have a positive impact. But if you miss payments or carry too large of a balance, it can negatively impact your credit score. 

Debit cards explained

Debit cards are payment cards that are linked directly to your checking account. When you make a purchase with a debit card, the money is immediately taken out of your account. 

You don’t have to apply for a debit card — you just need to have a checking account. Most people can get a debit card, even if they don’t have good credit. 

Benefits of a debit card

No cost: Most debit cards are completely free to use. There typically aren’t annual or monthly fees, and there are no interest costs because you’re spending your own money. Keep in mind that you can still be charged an overdraft fee if you spend more than you have available in your account. 

No temptation to overspend: With a debit card, you can only spend money that you have in your account, eliminating the temptation to overspend. 

No eligibility requirements: Debit cards come with checking accounts, so the requirements to get one are minimal to none.

No effect on credit score: Debit cards aren’t a credit product, so they don’t affect your credit score. 

Drawbacks of a debit card

No rewards: Most debit cards don’t earn any rewards for money spent with it.

Higher risk for fraudulent transactions: When a debit card is used, money leaves your account right away. This can create additional risk if your card is lost or stolen (more on this below). 

No credit building: Debit cards won’t affect your credit, which also means that they won’t help you build a positive credit history. 

Which is safer, debit or credit?

Both credit and debit cards are generally safe to use; they both have significant fraud prevention measures built into them. If your card is lost or stolen, you’ll typically be able to get your money back with either.

However, this is one area where credit cards do offer an advantage. If you notice fraudulent spending on your credit card, report it and the credit card company will start investigating it. Because you don’t have to pay for credit card charges right away, you have more time to sort it all out before it affects your finances.

With a debit card, the money leaves your account right away. You can still dispute a debit card charge, but it’s possible that a fraudulent transaction could affect your cash flow in the meantime. 

Bottom line

Credit cards allow you to spend borrowed money, while debit cards are simply a convenient way to spend money from your checking account. Credit cards are more costly to use and have stricter approval requirements. 

If you do choose to use credit cards, keeping your debt in check is vital for your financial well-being. Tally* is an app that helps qualifying Americans consolidate credit card balances into a lower-interest line of credit. Learn how Tally works here. 

*To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.