When it’s time to make a purchase—whether it be a few groceries at the supermarket or a major home repair—you’ll likely have the choice of credit vs. debit. But what is the difference between debit and credit? Which could be better for your financial situation?
We’ll cover the key details and explore several potential pros and cons of credit and debit transactions. We’ll also show which card type is most popular among US consumers.
Credit cards: How they work
With a credit card, you borrow money to make a purchase then pay it back. You can continually make purchases (i.e. borrow money) until you reach your credit limit. Because you can continuously borrow and make payments, credit cards are considered “revolving” debt.
When you apply for a credit card, the issuing company will check your credit history to determine your annual percentage rate (APR) and credit limit. Credit limits can range from a few hundred to tens of thousands of dollars, and APRs can range from about 12% to more than 20%. A better credit score will usually land you a higher limit and lower APR.
If you pay back the balance in full each month, you won’t be charged interest. If you don’t pay back the full balance, you’ll be charged interest on the remaining amount. Credit card interest compounds, so you’ll pay more interest the longer you wait to pay.
Potential pros:
- Buy now, pay later: Paying off a purchase gradually can be a good option for many consumers. Access to credit can also be a lifeline during a financial emergency.
- Improve your credit profile: If you’re trying to build credit, opening a credit card and keeping current on payments can help.
- Fraud protection: Federal regulations protect you from having to cover fraudulent transactions. The protections are generally stronger than those offered for unauthorized charges on a debit card.
- Perks and rewards: Some credit cards offer cash back or points toward airline and hotel loyalty programs.
Potential cons:
- Interest and late fees: Borrowing money—and not paying it back promptly—can be costly. Some cards also charge an annual fee just to keep the account open.
- Hurt your credit profile: Making late payments, skipping payments altogether, carrying a high balance and having too many open credit cards can all seriously harm your credit score.
Debit cards: How they work
With a debit card, you’re immediately spending your own money at the time of purchase. As such, you must have enough money in your account (or an overdraft agreement in place) to cover the purchase price.
Using a debit card is straightforward. You can either open a checking account and deposit funds or “load” money onto a prepaid debit card—then swipe the card or use it online to make purchases.
Potential pros:
- Easier to open: Prepaid debit cards are widely available and many don’t require you to submit personal information. It’s also fairly simple to open a checking account at a traditional financial institution, like a bank or credit union. Take note, though, the bank is likely to check your credit and pull your bank history report, which would reveal if you’ve ever had a checking account closed because you committed fraud or didn’t pay overdraft fees.
- Less debt: Because the money is disappearing instantly and automatically—no borrowing—you won’t pay interest. Plus, the cash-like effect can make it easier to control spending.
Potential cons:
- No benefit to your credit profile: Debit transactions aren’t reported to credit bureaus, so they won’t help you build credit. But if using a debit card is part of a broader strategy to reduce credit card debit and improve your financial wellbeing, your credit profile could benefit.
- Less purchasing power: You’re limited to the funds in your account, which can make it difficult (or impossible) to cover a large purchase or emergency.
- Overdraft fees: If you spend more than what’s available in your account, you’re likely to be hit with an overdraft fee.
Credit vs debit: Which is more popular?
According to Mintel, young consumers reach for a debit card more often than a credit card. In fact, 40% of younger Millennials—ages 23 to 30—prefer their debit card, regardless of purchase size.
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2 out of 3 Consumers who have a credit card |
80% Consumers who have a debit card |
40% Younger Millennials who prefer to use debit card regardless of purchase size |
When it comes to making a major purchase or covering everyday expenses, you might have options beyond credit vs debit: Kansas and Tennessee residents can now apply for a RISE line of credit. With a RISE line of credit, you apply once and can request cash advances as often as needed up to the available credit limit. This flexibility is key for hard-working Americans who might have unpredictable expenses or income.
Plus, RISE helps you build a better financial future. Our free financial wellness tools help you create a budget, monitor your credit score and learn better money habits.
