Debit or Credit Card?

The convenience of plastic, whether in the form of debit or credit cards, is hard to beat. They both offer advantages, yet have significantly different features and uses. Here is what to consider when deciding if you should make a purchase using a credit card or debit card.

Credit or Debit? What's the Difference?

Although banks and credit unions issue both debit and credit cards, they are similar in that they look alike and belong to the same networks, such as Mastercard or Visa. However, there are important distinctions between the two surrounding debt.

A credit card is based on a loan from the issuing entity and represents debt to you — the card user. A debit card is self-funded by you through deposits made to the financial institution issuing the debit card. In other words, you incur debt when you use a credit card, while with a debit card you pay for purchases of goods and services with money you already have.

Advantages of Credit Cards

Credit cards offer many advantages to you as a consumer. Although different cards may have different sets of terms and conditions, those advantages may potentially include:

1. Building your credit, which helps you to qualify for other loans, such as a mortgage.
2. The ability to borrow funds to make a purchase if you do not have the money readily available.
3. Taking advantage of credit card incentives, like the ability to accumulate reward points, airline miles, or receive cash back when making purchases.
4. Receiving the credit card’s additional warranty coverage on merchandise above what is offered by the product manufacturer.

Advantages of Debit Cards

Similarly, debit cards also offer distinct advantages to you as a consumer which may potentially include:

1. Enjoying no annual fees associated with a debit card.
2. Potentially reducing your amount of debt, since purchases are fully paid for out of your bank account balance.
3. Avoiding interest charges since you are using your own funds.
4. Setting up automatic transfers between accounts.
5. Withdrawing cash from an ATM or with some retailers at the point-of-sale.

Like credit cards, terms and conditions may be different between debit cards, so it is crucial that you understand which of these advantages apply to your specific card and which do not.

There’s no “best” card for everyone. Instead, the best card type depends on your unique financial situation, past credit history, comfort with incurring debt, projected use for the card, and what, if anything, you’d like in return for using it.