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 take a look at 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, usually 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 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 the statement balance to avoid interest charges. The billing cycle is usually monthly.
Beyond making purchases, many credit cards also allow for things like cash advances and balance transfers.
Credit cards 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. Demonstrating responsible credit card use by doing things like making on-time payments and keeping your credit utilization low can improve your creditworthiness. Negatives, like missed payments or high utilization, can damage your credit score.
Fraud protection and limited liability: Many credit cards – including all Citi credit cards – come with $0 liability on unauthorized charges.
Rewards: Some credit cards may offer the opportunity to earn points or miles than can be redeemed for rewards. Cards may offer other perks, such as credits for 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 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 are applicable.
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 with a debit card, you draw on the funds in that account. In most cases, your withdrawal or purchase cannot exceed the balance in your account.
There are also prepaid debit cards. These 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 cards 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).
Fewer charges and fees: As long as you have enough money in your account to cover a transaction, you may not be required to pay any fees. However, some banks may charge a monthly maintenance fee to cover the costs of maintaining your account and providing services.
Help 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
Credit history: You build credit by showing lenders you can borrow and repay money responsibly. Because you’re using your own money when you spend with a debit card, using a debit card does not typically impact your creditworthiness.
Less protection: While debit cards, especially those issued by large banks, typically have some fraud protections, they generally have fewer protections than credit cards regarding fraudulent transactions and lost or stolen cards.
No rewards: Unlike credit cards, debit cards typically do not offer perks such as the ability to earn points or miles.
Potential fees: It’s possible to incur fees with a debit card, including usage fees from ATMs out of your bank’s network, and depending on your bank you may incur overdraft fees if you withdraw more than your account balance
Should you use a debit card or a credit card?
Whether to use a credit card or a debit card depends on many factors, including personal needs, spending habits and financial goals. It is important to honestly assess your own tendencies. For example, if you feel that you might overspend with a line of credit, then a debit card might be a good choice because they may make it harder to overspend. If you want to build a credit history and earn rewards along the way, a credit card might make more sense. It doesn’t have to boil down to one 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.
