Credit Cards vs. Debit Cards: A Comprehensive Comparison

By Craig Ford. Last updated 4 June 2014. 8 comments
Photo: Andres Rueda

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"Credit cards and debit cards have the exact same benefits."

I've heard this statement for a long time, but I wanted to test it out to see if it is true. Unfortunately, we often pass along information we received because we either assume it to be true, or we've heard it from a single reputable source. (See also: 10 Tricks to Save Money with Credit Cards)

Basic differences between a debit card and a credit card

When you use a credit card, the credit card company essentially extends you a loan for the amount purchased. You typically sign for the purchase, and when they send you a bill, you are obligated to pay your balance. If you do not, the credit card company will charge you interest rates and fees.

A debit card is associated with your bank account. When you make a purchase, that exact amount of money is taken out of your bank account within days. When you use a debit card, you typically use a PIN number.

The cards look the same, are scanned the same, but are very, very, different.

Head-to-head comparison

Which offers the best card protection benefits? Credit Cards.

Credit card purchases are covered under the Fair Credit Billing Act. The act states that when you purchase something with a credit card, you have no liability for fraudulent purchases, damaged goods, and products that were never delivered.

If you make a purchase with a debit card, the Electronic Transfer Act does provide some protection during a dispute or error. If you notify your bank within two days, your liability is limited to $50. However, between two days and six days your liability could increase to $500. Waiting more than six days could mean you have no coverage.

Currently, Visa and MasterCard do have policies in place to protect consumers. MSN reports:

Visa and MasterCard also offer zero liability for unauthorized transactions made over their networks.

But, Visa does have an exception for negligence, and MasterCard also has an exception for those with delinquent accounts or who have reported unauthorized use within the last two years.

Remember, debit cards rely on card policies for protection, while credit card liability is the law.

Which offers the most convenient way to resolve a problem with purchases? Credit cards.

In the case of debit cards, MSN Money claims

Consumers must try to resolve the dispute with a merchant on their own before they contact their debit card issuer. "The merchant may want to make some other arrangement like a store credit or a gift certificate or some other thing," says Hogarth, of the Fed. "That isn't exactly putting money back in your account."

My experience: I recently purchased a product online with my credit card. The item has a full 60-day money back guarantee, but after four emails were not returned, I made a call to my credit card company. Within a day, the money was put back into my account and the credit card company took full responsibility. It sounds like the process would not have been so simple with a debit card.

Which is better if you work for a company that uses a reimbursement system? Credit cards.

With a credit card you have the ability to delay or float payments. This is especially convenient when you use a reimbursement system with your employer. You can make the purchase today and you have 30-40 days until the payment is due. For anyone who makes purchases on behalf of their company, a credit card certainly carries the advantage.

Which is better when renting a car? Credit cards.

Most major credit cards offer an auto rental collision damage waiver. In addition, several major car rental companies do not accept debit cards as a form of payment.

What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

My experience: Last year, our family was in Australia and I wanted to use a debit card to rent a car. In order for the company to accept my debit card, I would need to let them to put a $500 hold on our checking account. Since we planned to spend cash for purchases on our vacation, I wasn't sure that we had enough available balance for the hold so I used a credit card. When I returned the vehicle, they billed the charges on to the debit card. On that occasion I was glad to have a credit card in my wallet.

Which is better for avoiding credit card debt? No brainer — debit cards.

This, by far, is the strongest argument in favor of the debit card. If it helps you control your spending and helps you avoid credit card debt, then that one feature alone is as precious as gold. If you currently have credit card debt or are trying to get out of credit card debt, then cutting up the credit card and using a debt card is probably one of the smartest decisions you can make.

Which provides more rewards? Credit cards.

Credit card rewards are one of the primary reasons why people use credit cards. Anti-credit card people say that credit cards don't really offer valuable rewards, but I'll let you be the judge.

PerkStreet Financial is an example of a bank that is now also offering cash back for debit card purchases.

Which is best to use overseas? Depends on your particular bank and credit card.

Depending on your bank policy and your credit card foreign currency exchange rate, either one might be better. In my case, my ATM charges a 1% fee for use overseas, but I do have a Schwab Visa card that offers a 0% foreign currency exchange and 2% cash back. However, it is not uncommon to pay a 3% foreign currency exchange fee with a credit card. If you plan to travel overseas, you will need to explore the best way to exchange foreign currency before heading on your trip. (See also: Using Your Debit Card on the Road)

Which is more expensive? It depends on use.

Both debit cards and credit cards have associated fees. Looking at one of my credit card fees and finance charges, if I miss a payment, I'll pay between $15-$39. If I don't pay my balance in full, the default APR (annual percentage rate) is 23.99%. Yes, that is expensive.

ING Direct claims the average bank overdraft charge is $30. However, a bank can also manipulate overdraft fees so they really stack up. Debit cards can be expensive too.

A person who overcharges her account five times in the month and a person who pays a month of interest and late payments are probably paying a similar amount in fees.

Moral of the story: Both are extremely expensive to use if you don't plan to learn how to budget and properly manage your finances. If you don't track your spending well, both could mean a financial train wreck is waiting in your future.

Ultimately, it comes down to this last question.

Do debit cards feel more like real money? I'm undecided.

Creditcards.com reports

A recent TNS Financial Services Consumer Credit Card Program Study indicated that over 60 percent of consumers prefer using debit cards to credit cards as a payment vehicle, because debit feels more like "real money."

Ultimately, I'm yet to be convinced.

Does sliding a plastic ATM card feel more like money than a plastic credit card? I've personally never felt the difference. Do you?

Last year I totaled all my credit card purchases to find out if I really spend more with credit than cash. I was actually surprised by the results because I saved money by using a credit card. As such, I'm guessing we really can't answer this question until someone sits down and does some real research.

Final conclusion

Choose whichever method best helps you manage your money, but realize credit cards do clearly have more benefits. The risk may outweigh the benefits, so I'm not suggesting you use a credit card. Also, you might consider comparing the cost of paying cash versus either a credit card or debit. Just understand the differences, and then make an informed decision.

What are your thoughts regarding the true differences between credit cards and debit cards?

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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Guest's picture
Nick

Great summary. I just signed up for a rewards debit card that I'll use for purchases where I'm not as concerned about the credit card protections (like small, daily, in-person purchases). I'll likely use the credit card for electronics or online purchases from sources that are not top-of-the-line for trustworthiness.

And I'll balance the relative rewards (and cash back promotions) for a tie breaker. Seems a little complicated, but I enjoy the analysis. And I only have a few cards, so there isn't a ton of homework with this for me.

I agree that it's personal though. If you can't manage credit cards well then they may not be right for you at all.

Guest's picture
Des

Articles like this really irritate me. I have read different versions of this same article half a dozen times and they all have the same fatal flaw: they totally ignore that debit cards can be used as credit cards WITH THE EXACT SAME PROTECTIONS!! If your debit card has a Visa or MC logo (and I've never seen one that didn't) you can run it as a credit card, sign for the purchase, and get all the benefits of a credit card while still staying out of debt.

Its like writing an article about buying a new car verses used and forgetting to mention that used is cheaper. It is such a huge feature, it is hard to understand why it isn't mentioned.

Guest's picture
stannius

There is a whole paragraph about how debit cards do carry similar protection, but only by Visa/MC policy and not by law. And it even details some nuances on how the protection differs. I can't say that the paragraph wasn't added after your comment, but it's there now.

Craig Ford's picture

@Stannius - this is the original article and has not been change. I think @Des might have missed the section.

Guest's picture
kjd

With Chase Bank, after and upon a credit card recurring payment which may take upto 3 days to clear, there is a extended transaction fee of $15 over and beyond a non sufficient fee of $35 if you do not bring your balance back to positive within the required days.(usually 3 days not including weekends). Therefore, a signature transaction might actually end up costing you a lot more than originally intended.(especially if u r single and traveling overseas). I had chosen to opt out of overdraft protection before august 15th but that does not apply to recurring credit card signature payments.I would like someone to help me fight this with one of the federal bureau agencies (most likely FDIC or OCC).I figured when you opt-out of credit card overdraft protection that all credit card transactions are subject to being denied including recurring credit card payments. I have been proven wrong and i have documents to prove chase has charged me non-sufficient as well as extended days non-sufficient fund fees.

Guest's picture

It really depends quite heavily on your particular bank. My bank, with associated MC logo debit card, offers 0 fees other than insufficient funds. Overdraft is free and decent management will avoid all NSF fees. They offer easily obtained 0 liability on unauthorized purchases, which I experienced in person when I was charged more than a dozen small online purchases I did not initiate, most of which garnered NSF fees, and the entire mess was reversed and new card issued within a few hours with a single phone call. Their policy is to apply debits in the order most benefiting the customer and costing the fewest NSF fees when applicable. And they offer a decent rewards system of either cash or products. My credit card, on the other hand, has no rewards and charges interest on purchases even when the balance is paid in full before the due date.

My point being: not all banks are evil and some can even be better than credit cards. For those with other banks and in other situations, these points may be absolutely correct. And it is inconvenient - but not impossible - to rent a car with a debit card, I'll grant you that. :)

Guest's picture
Frances

The article should also consider the fees that are paid by the merchant when using credit cards or a signature purchase on a debit card. I do not use signature transactions on my debit card for this exact reason. Since the money has vanished from my account instantly, where is the "loan" aspect of this and why should the merchant pay any fee whatsoever?

I do have to agree that using a debit card to rent a car (and sometimes for hotels) is annoying because they hold the money. However, I just increase the amount in my checking account for the duration of the "hold" and then put the money back into savings. I love it when I can keep credit card companies/banks from getting these fees!

Guest's picture
Simon

Well, didn't know that much difference between those 2 cards. Guess this help me in picking a credit card instead of debt card!