Credit Card vs. Debit Card: Key Differences

The bill for dinner at the restaurant is presented, and you have graciously offered to pay. Should you use a credit card or a debit card? You may think that it does not matter, but there are some important differences.

Credit cards: Essentially, a credit card allows you to use the issuer’s money to make a purchase. Then you pay back the issuer later. If you pay the bill within the billing period—usually 15 to 45 days—there is usually no interest charge. However, if you do not make payments in a timely fashion, you must pay interest at the established rate, on top of the regular charge for purchases.

Used responsibly, credit cards offer several advantages. They help build a strong credit rating when you pay your bills on time. Issuers often offer rewards for gifts, discounts and the like. In addition, you have some protection if someone steals your card or information. If you spot a fraudulent charge, you can call the card issuer, dispute the charge and have the amount removed from your balance. Conversely, if your debit card information is stolen, it can take weeks or even months to investigate the matter. In the meantime, you are out the funds.

Debit cards: A debit card is linked to your bank account, so your outlays are automatically subtracted from your account. This is a convenient alternative to paying cash, especially for online shopping. A debit card can also help you with your monthly budget. If you use the card regularly, your monthly statement can provide a valuable overview of expenses and payments. And, unlike a credit card, your bank balance is reduced with each debit card transaction, so you are less likely to overspend—at least in theory.

But debit cards generally offer less protection than credit cards. Once you have used a debit card, the retailer has your money, so you do not have any leverage. For disputed charges, there is no guarantee you will ever get your money back. Comparison: When you pay for goods or services with a credit card and you are not satisfied with the purchase, the card issuer can legally withhold payment from the retailer until the matter is resolved.

If you are more inclined to use a credit card and expect to carry a balance, you may prefer a “plain-vanilla” card with no annual fee and a low annual interest rate. The interest you would have to pay on other cards with incentives will more than likely offset the available perks. Information comparing various credit cards can easily be found via the Internet. You can also apply for cards online, but limit your applications to one or two, to avoid damages to your credit rating.

Finally, be aware that card issuers can raise your interest rate, but there are restrictions under recent law changes.

So which type of card should you choose—credit or debit? Many consumers keep both in their wallets or purses. No matter which one you use, be careful not to spend more than you can legitimately afford.