Credit and debit cards are both methods of payment and can be used in similar ways. However, there are key differences between the two. Most importantly, a credit card uses money borrowed from a card issuer to make a purchase, while a debit card draws on existing funds in your bank account.
Let’s explore the differences between credit and debit cards.
What is a credit card?
A credit card uses a revolving line of credit issued by a financial institution, such as a bank or credit union. When you use a credit card, you borrow from that institution. You are bound by your card issuer agreement to pay back the amount borrowed plus any applicable interest.
However, you aren’t typically obligated to pay the full current balance all at once. You can pay the minimum payment (usually a percentage of the balance or a set amount), or you may pay the full statement balance to avoid interest charges. The billing cycle is usually monthly.
Beyond making purchases, many credit cards also allow you to take out cash advances and make balance transfers.
Credit card pros and cons
Let’s look at the benefits and drawbacks of using a credit card.
Pros of using a credit card
- Builds credit history: How you use your credit card impacts your creditworthiness. Responsible credit card use (such as making on-time payments and keeping your credit utilization low) can improve your creditworthiness. At the same time, missed payments or high utilization can damage your credit score.
- Limited liability: Some credit cards, including select Citi® credit cards, come with $0 liability on unauthorized charges.
- Perks: Some credit cards may let you earn points or miles that can be redeemed for rewards. Cards may offer other perks, such as cash back on certain purchases.
Cons of using a credit card
- Debt: Spending with a credit card means borrowing the card issuer’s money. If you can’t pay back what you spent on purchases, credit card debt can grow over time.
- Interest and fees: If you don’t pay your statement balance in full every month, or you take out a cash advance, you can end up paying interest and fees. It’s important to read the terms and conditions of your card so you understand when fees and interest apply.
What is a debit card?
A debit card essentially allows you to pay with cash without using cash. It’s linked to a bank account (usually a checking account). When you make a purchase or take out cash with a debit card, you draw on the funds in that account. In most cases, your purchase or withdrawal cannot exceed the balance in your account.
There are also prepaid debit cards, which are not connected to your bank account. Instead, the money is preloaded to be used for purchases. You may also be able to withdraw cash from an ATM.
Debit card pros and cons
Here are some benefits and drawbacks of using a debit card.
Pros of using a debit card
- Convenience: Debit cards offer the convenience of not needing cash to make a purchase. You can also use your debit card to withdraw cash from your bank account (though there may be a fee for ATMs that aren’t part of your bank’s network).
- No interest charges: Using your debit card means you won’t pay interest on those charges, allowing you to avoid debt.
- Helps you stay on budget: Because debit cards draw from your bank account, it can be harder to spend more than you have.
Cons of using a debit card
- Doesn’t build credit: Since you’re using your own money when you spend with a debit card, it won’t typically impact your creditworthiness.
- Less protection: Compared to credit cards, debit cards generally have fewer protections for fraudulent transactions and lost or stolen cards.
- No rewards: Unlike credit cards, debit cards don’t typically offer perks, such as the ability to earn points or miles.
- Potential fees: It’s possible to incur fees with a debit card, including out-of-network ATM fees: Some banks may also charge a monthly service fee to cover the costs of maintaining your account and providing services.
Should you use a debit card or a credit card?
Credit cards and debit cards can often serve the same purpose, but there may be times when it makes sense to use one over another. In general, it depends on your spending needs and habits as well as your financial goals. For example, if you feel that a credit card might lead to overspending, then a debit card might be a good choice because it limits you to existing funds. But if you want to build a credit history and earn rewards along the way, a credit card might make more sense.
Remember: You don’t need to choose one type of card or the other. Many people use both, taking advantage of the different benefits each has to offer.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
