Debit Card vs. Credit Card – Similarities and Differences

Decades ago, people used cash as their only means of transacting financially. Then, throughout the 1900s, new payment methods, such as credit cards and debit cards, started emerging. These became so popular that today, many have stopped carrying around paper money altogether. 

However, even though the two cards were created with different purposes in mind, they are also similar in several ways, which often leads to confusion. That’s why we’ve decided to write a guide that will, hopefully, answer any questions you may have regarding these payment options.

Similarities Between Debit and Credit Cards

Let’s begin by going over the exact features these cards have in common.

Appearance

Debit cards and credit cards look almost exactly the same. They have 16-digit card numbers, expiration dates, and card verification codes. 

The card number runs across the middle of the front side of your card, while the expiration date is right below it, and it consists of the month and the last two digits of the year. You’ll find the card verification code, sometimes called the CVC, on the back – those three or four digits printed to the right of the signature strip.

Fees

Fees are an important part of our discussion, and because of that, we’ll go into more detail about the costs associated with each of these payment options. For now, at least, you should know that there’s no such thing as a free card of any kind. Every card issuer will find a way to make a profit, whether it’s through purchase and account fees or interest charges.

Personal Identification Number

A personal identification number (commonly referred to as a PIN) is a unique code assigned to or chosen by the cardholder. Most types of cards have PINs, but you won’t always be required to use them.

Reward Programs

If you’d like to take advantage of the potential cashback payouts and points, which can usually be used to pay for flights, you should definitely look into cards with loyalty or reward programs. When it comes to such perks, credit cards are the better option, but we’ll talk about that more later on.

Fraud Protection

Payment card fraud is when somebody unauthorized makes purchases using another individual’s card or card number, which can cause serious problems to the victim. Luckily, both credit and debit card holders are entitled to fraud protection.

According to the Fair Credit Billing Act, as long as the credit card holder notifies the card issuer within 30 days of loss or theft, their maximum liability for fraudulent purchases can’t exceed $50.

Similarly, under the Electronic Fund Transfer Act, if the customer reports the loss or theft of their debit card within 48 hours of discovering that one of these incidents has occurred, their card liability won’t exceed $50.

However, after 48 hours, the debit card user’s liability will rise to $500, and in situations when more than 60 days have gone by, there will no longer be a liability limit.

Key Differences

The main difference between these two types of cards is that debit cards enable you to make payments using funds you have deposited at the bank, while credit cards allow you to access a line of credit, which is a loan from a financial institution you can access at any time and repay immediately or at a later date.

Fees

The fee structure is the main difference between credit and debit cards, and we'll explain why below.

Credit Cards

As is the case with any type of loan, the money you spend using your credit card has to be paid back with interest. That’s why choosing a good annual percentage rate is key to not getting overwhelmed with debt. The APR is a combination of the credit card fees and the interest rate. It represents the actual cost of the card issuer’s services.

Potential credit card owners need to be aware of the following fees:

• Annual fee: Many credit card issuers charge a yearly fee for simply having the card, and it typically ranges from $49 to $500.
• Late payment fee: If you don’t make your payments on time, you’ll have to pay a penalty fee, which is usually around $36.
• Foreign transaction fee: You may incur a fee of up to 3% for every purchase you make outside of the US.
• Cash advance fee: Cash advances are most commonly associated with credit cards. A typical cash advance fee equals 5% of the requested amount.
• Balance transfer fee: A balance transfer fee is charged when you transfer debt from one credit card to another. You can expect this charge to be between 3% and 5%, but if you’re persistent, you can find balance transfer cards with 0% transfer fees. 
• Returned payment fee: If you don’t have enough money in your account to cover a scheduled credit card bill, your payment will be returned, and you’ll probably need to pay a fee that in most cases doesn’t exceed $40.
• Over-the-limit fee: Not only do credit card issuers offer credit limits, but they also let customers exceed them as well. To spend over your limit, you have to notify your creditor that you’d like these kinds of transactions approved. In case you don’t do so, your purchase will be declined. However, you should keep in mind that a single over-the-limit fee can go up to $35.

Debit Cards

Debit cards essentially work like cash, meaning that there’s no interest to worry about, and since there’s no interest, the majority of the fees we’ve listed above don’t apply here, making them the more budget-friendly option.

Nevertheless, you’ll have a few checking account fees to look out for:

• Monthly service fees: Banks and credit unions charge monthly fees for maintaining your account. They often aren’t more than $15.
• ATM fees: When you use ATMs in your bank’s or credit union’s network, you won’t incur a withdrawal fee. But with out-of-network ATMs, you’ll have to pay your debit card issuer between $1.50 and $3.50 and the ATM operator approximately $3.
• Foreign transaction fees: Whether you’re a credit or debit card user, you’ll have to deal with foreign transaction fees either way. For debit cards, they tend to range from 1% to 3% of the purchased amount.
• Overdraft fees: If you don’t have enough money in your account to cover a withdrawal you’ve made, your debit card issuer will cover the difference. This service will usually cost you around $35. To avoid this expense, you can set up balance alerts or link your savings account to your checking account so that funds from your savings account are transferred to your checking account when you overdraw. You’ll most likely be charged fees for these transactions, but they are almost always less than the overdraft fee.
• Paper statement fees: These usually amount to $2 or $3, but you can easily get rid of them by opting for online paperless statements.
• Account closure fees: You’ll have to pay a sum of around $25 if you close your account within 90 or 180 days of opening it. 

Reward Programs

Another big difference comes down to rewards programs.

Credit Cards

There are many credit cards with reward programs. The most common perks are:

• Sign-up bonuses: If you have a good credit score, you can qualify for credit card benefits in the form of cash or extra points as soon as you take your card out. 
• Cashback: With cashback credit cards, you’ll usually get between 1% and 5% of every one of your purchases back.
• Points or miles: You could get a card that lets you collect points for dining out, staying at hotels, grocery shopping, and the like, or one that allows you to accumulate miles for flights. 

Know that credit cards with higher annual fees, in most cases, offer more valuable rewards. 

Debit Cards

Yet another difference is that there are significantly fewer reward debit cards than there are reward credit cards. What’s more, the benefits, which are often points or cashback, tend to be less generous as well. 

Fraud Protection

Credit cards tend to provide more protection than debit cards but debit cards issued by well-known payment processors, such as Visa and Mastercard, are very safe choices as well. When it comes to guarding yourself against fraud, reporting the malicious activity in a timely manner plays a more important role than card types do.

Additional Differences

Before we end our guide, we’d like to inform you about a few more dissimilarities.

Debt Accumulation

It’s a known fact that people tend to spend more when using cards as opposed to paying with cash, and because of that, a debit card, which only lets you use the money you have in your account, is great for those trying to stick to a budget.

If you don’t have a bank account, you can use a prepaid debit card as an alternative to paper money. You can put funds onto it online or at an ATM.

Credit Score Improvements

One of the disadvantages of a debit card is that you can’t use it to build your credit history. Credit card use, on the other hand, is visible on credit reports. By making your payments on time and keeping your credit utilization low, you could boost your credit score quite a bit.

However, you shouldn’t take this opportunity lightly since, along with your good behavior, your not-so-responsible financial behavior will be reported as well. 

If you decide to get a credit card, conduct a thorough credit card comparison so that you don’t get burdened with a high interest rate or miss out on any good deals. For instance, there are credit cards suited to young adults as they are easy to qualify for and provide plenty of perks.