The Difference Between Credit & Debit Cards

There are more than a billion credit and debit cards in the U.S. today. Both kinds of cards can be used to pay for purchases and get cash. Most people understand that, when using a credit card, they are incurring a loan, while a debit card transaction takes money directly from their checking account. Beyond that, the differences may not be as well-known or understood. There is also confusion about what it means when a debit card customer is asked whether they want to use "debit" or "credit".

A credit card transaction is a loan from the issuer that, if paid back within the grace period-- usually 15 to 45 days-- is interest-free. Any amount not paid back by then will begin incurring very large interest charges. Also, if minimum payments are not paid, additional fees are added.

A debit card transaction is the electronic equivalent of writing a check: the amount is deducted from the person's checking account. If the transaction exceeds the account balance, money is transferred from a linked savings account. This is called "overdraft protection" and usually incurs extra fees and interest, which is why many banks do not let their customers opt out of this "service". I have it disabled and prefer debit cards over credit cards for various reasons.

Customers using their credit card in person must sign their name on a receipt. Sometimes this is waived on very small amounts. When used over the phone or online, they must provide the three-digit number on the back of the credit card.

Customers using their debit card in debit mode must enter a four-digit PIN (Personal Identification Number). When used in credit mode, they must sign a receipt, although, in some situations, like getting gas at an automated pump, this is also waived.

Credit cards can be used to get cash advances, but, as these are loans, cash advances always incur hefty interest payments.

Debit cards are frequently used to get cash from checking accounts. Many ATM (Automated Teller Machines) charge a fee when dispensing cash unless the ATM belongs to the card-issuing bank's network.

Credit cards also offer advantages that debit cards do not. If bills are paid on time, they help build credit. Some offer rewards like gifts, discounts or cash back. Perhaps the most important advantage is the protection credit cards provide. There are federal laws that protect credit card charges: a fraudulent claim may be disputed with the card issuer and the charge should be removed from the balance. In contrast, with debit cards, the retailer already has the money and these federal laws do not apply.

When using a debit card for purchases, a customer may be asked if they want to use "debit" or "credit". Regardless of the choice, the money is coming out of their account. The only difference many customers see is that they have to enter their PIN for "debit" versus signing a receipt for "credit". A credit transaction goes through the credit network and gets some fraud protection and possible reward points, but extra cash back is not an option and the retailer may be charged for the transaction. A debit transaction allows extra cash back without additional fees and the retailer is not charged for the transaction.

Both credit cards and debit cards make sense. To reap the benefits of both, cardholders shouldn't spend more than they have.