How do credit cards work, and how are they different from debit cards?

What’s the Difference Between a Credit Card and Debit Card?

How do credit cards work, and how are they different from debit cards?

If you’re new to the world of personal finance, one of the most common questions that money newbies ask is: What’s the difference between a credit card and debit card?

It’s also one of the most important questions for you to get right. There are some pretty significant differences between credit cards and debit cards, and understanding those differences could mean the difference between having a healthy relationship with money and struggling.

Below, we take a look at how debit cards and credit cards work, explore the key differences between them, and offer some advice to help you understand when you should use (or avoid using) each.

You probably already have an idea about what a debit card is, but just in case you don’t: A debit card is a financial product offered by banks and other depository entities that is linked to a checking account.

You can make a purchase with a debit card either by swiping it physically at a store or by entering your card number online or by phone.

Typically, you will be required to enter a 4-digit PIN to confirm that the card does, in fact, belong to you.

Most debit cards are made plastic (though some premium cards can be made metal) and contain both a magnetic strip and security chip that are used to make transactions.

How do debit cards work?

When you make a purchase using a debit card, it’s a lot paying with cash: You can only spend what you have.

So long as you have enough money in your checking account linked to the card, those funds will be deducted from your account and transferred to the retailer. This transfer will often happen instantly, though in some circumstances it could take up to 24 hours or more for your checking account to reflect the new balance.

And if you don’t have enough money in your checking account? That depends on whether or not you’ve opted into overdraft protection through your bank. Overdraft protection means that you have linked a secondary funding source (often a savings account or credit card) to your checking account.

If you have opted into overdraft protection, the transaction will be approved and your bank will transfer the required amount of money from the secondary funding source over to your checking account.

They’ll also charge you a fee. According to Bankrate, the average overdraft fee in 2019 was $33.36 per overdraft.

If you have not opted into an overdraft protection service through your bank, then your card will simply be declined.

You can also use your debit card to withdraw money as cash from an ATM or from some retailers, though you may be charged a fee if you use an out-of-network ATM. And those fees can be hefty: The average is currently $4.72, according to Bankrate.

What is a credit card?

A credit card is similar to a debit card in a number of ways. Both are made either plastic or metal; both contain a magnetic strip and security chip; both are used to make purchases, either in person or electronically. But that is where the similarities end.

While debit cards are linked to a checking account (and withdraw money from that linked account in order to complete transactions), credit cards are linked to a line of credit—essentially making them a form of loan that you can access as needed.

How do credit cards work?

The chief difference between a debit card and a credit card is this: When you make a purchase with a debit card, you do not need to pay the money back because you are accessing your own money.

When you make a purchase with a credit card, though, you do have to pay it back.

If you are unable to pay the balance back in full before your payment period ends (typically a month) then that balance will begin to accrue interest, just any other loan.

And because credit cards are a form of unsecured debt (they are not backed by an asset a house or a car), the interest charged on a credit card can be particularly high.

With a debit card, you have a natural limit to how much money you can spend: the amount of money that is in your checking account. Credit cards also have a limit, called your credit limit, which is determined by a number of factors including your credit score.

Your credit limit is the maximum amount of money that you can charge to your credit card at any given time. Although you can max out your credit card if you want, doing so can negatively affect your credit score by driving up your credit utilization rate (how much of your available credit is being used), so it is generally not advisable.

debit cards, you can sometimes use your credit card to withdraw cash if it is needed. This is called a cash advance. There is typically a limit to how much you can withdraw at one time, and you may be charged a fee by your lender.

Credit card vs. debit card: when to use each

Now that you understand the differences between a debit card and credit card, you may be wondering when it makes sense for you to use each. Credit cards and debit cards are two very different financial tools, so it’s important to make sure you know when to use each one. Consider the following advice to ensure you are using the right card at the right time.

If you are new to budgeting

If budgeting and managing your own money is new for you, using your debit card for everyday purchases groceries and other regular expenses can help you stick to your budget and get a feel for what normal spending is for you.

If you have trouble controlling your spending

When it comes to spending, some of us have more self-control than others. If in the past you have experienced issues reining in your spending, a debit card is ly to be the better option for most transactions.

If you are applying for a mortgage or other major loan

If you are about to buy a home and know you will need to rely on a mortgage to do so, racking up credit card charges could negatively impact your score and impact your ability to be approved or the interest rate you will qualify for. Debit cards do not impact your credit score, and so are ly the better option in these situations.

If you are consciously trying to build your credit history

Signing up for a credit card can be a great way to begin building your credit history and might even help you improve your score. Just be sure that you start small, never spend more than you can afford to pay back, and pay off your balance each month before you are charged interest.

If you are making an online purchase

Using a debit card or credit card to make a purchase online opens you up to the risk of identity theft. That being said, credit cards typically come with stronger customer protections that can help you limit your risk. If you are making a purchase online, using a credit card may be the better option.

If you are renting a car or hotel room

Many hotels and car rental companies will not accept a debit card for reservations. They require a credit card so that if you were to damage the room or car, they can charge you for those charges.

If you are making a major purchase

If you’re making a major purchase an electronic or an appliance, consider using your credit card. Doing so can offer some valuable benefits, a free extended warranty for certain purchases. You should check your cardholder’s agreement to know what you may be eligible for.

While the tips outlined above are a great rule of thumb, the key is being practical and smart about how you use credit and debit cards. So long as you stay within your budget and only spend as much as you can afford, they can both be incredibly helpful financial tools.

This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice.

This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.


Debit Card vs. Credit Card: What is the Difference?

How do credit cards work, and how are they different from debit cards?

Most people today own both a debit card and a credit card, but many are confused about what the difference is between the two. It’s a common source of confusion, since the cards look identical and have similar uses.

So, what exactly is the difference between those thin, plastic rectangles in your wallet? Read on to find out from the experts at our San Diego credit union!

Money Source

The main difference between a debit card vs. credit card is where the cards pull money out from (which account is funding your shopping spree). Our debit card takes money from your checking account whereas, a credit card instead, charges you a line of credit.

CliffsNotes Edition:

  • Debit = money from your checking account
  • Credit = borrowed money from credit card companies

Types of Debit and Credit Cards

To help you better understand the difference between a debit card and credit card, let’s identify the distinctions within each type of card. Both debit cards and credit cards can be broken up into smaller sub-categories.

Types of Credit Cards:

  • Standard Card – A basic card that extends a line of credit to its users.
  • Secured Credit Card – One that requires an initial cash deposit, which is then held by the issuer as collateral.
  • Charge Card – Although this card has no spending limit, oftentimes the issuer will not allow unpaid balances to carry over from month to month.
  • Rewards Card – These offer cashback, travel points, and other benefits.

Types of Debit Cards:

  • Standard Debit Card – This card will draw funds from your bank account.
  • Electronic Benefits Transfer (EBT) Card – These are issued by state or federal agencies to allow qualifying individuals to use their benefits when making purchases.
  • Prepaid Debit Card – This card works rather a gift card. As the name implies, it is prepaid up to a specified amount. It allows people to make purchases up to that amount without the need of accessing bank accounts.

Making Purchases

There are differences when you physically make purchases between a credit and debit card.

Pin vs. No Pin

If you decide to use your debit card for a purchase or at an ATM, you will be required to enter a four digit PIN number. With a credit card you might need to enter your zip code, a signature, a swipe and you are good-to-go.

Almost all merchants require a signature when you swipe your credit card. Debit cards, on the other hand, do not require them.

Exception to the rule: Some merchants will let you use your debit card as a ‘credit card’ and use a signature rather than entering a PIN.


Writing a check seems rare these days. However, there is definitely a time and a place for writing those old-fashioned paper slips. Debit cards connect to your checking account, so funds from checks and debit cards are coming out from the same place.


When discussing debit card vs credit card difference, rewards and rewards programs are some of the things that come to mind. While debit cards are more straightforward and do not offer any rewards; credit cards on the other-hand provide an abundance. For some people, a rewards program may be the biggest benefit to having a credit card.

Credit Card Reward Types:

  • Points: With rewards points, the more money you spend, the more points you receive. These points can then be cashed in for gift cards, special offers, hotel stays, and more.
  • Frequent Flyer: For those who travel a lot, frequent flyer rewards are the perfect option for you because the more you fly, you earn extra points.
  • Spending Rewards: Certain rewards programs are catered toward certain products. Gas, groceries, retail — these are all possible categories where you earn higher rewards.
  • Travel Rewards: Travel rewards are similar to spending rewards — when the spending is specifically on travel. Think – car rentals, hotels, airline tickets, or train tickets. Buying any of these on a travel rewards card will accumulate more points and more savings for you!

Sorry, We Only Accept Credit Cards

While debit cards are widely accepted, there are some situations that require credit cards. This may happen while you’re traveling — companies, hotels etc., may bill you for potential damages. These situations can come up in:

  • Car rentals
  • Hotel bookings
  • Making purchases while traveling overseas

Fraud Protection

Most people are anxious about having their identity stolen when they use credit or debit cards and although this can happen when using both, credit cards often offer excellent fraud protection.

While you can’t always prevent fraud from happening, you can stop it as soon as possible:

  • Check your statements regularly
  • Immediately report unknown fraudulent charges
  • Familiarize yourself with your card’s fraud protection

Debit cards and credit cards differ slightly when it comes to fraud transactions and protection:

  • Credit Cards: Offer a lot more security when your card has an authorized charge. The maximum liability for purchases after your card is stolen will be higher for debit cards.
  • Debit Cards: Generally speaking, customers get the same protection if theft is reported within 48 hours. After that, your liability goes up to $500. Then, after 60 days, there is no limit.

Interest Rates: Credit vs. Debit

Interest is something worth paying attention to, especially if you don’t want to throw your money away! If you make a purchase on a credit card, you are charged interest. However, this interest will disappear as long as you pay your balance off by the end of the month. Since debit cards pull directly from your funds, you do not pay interest.


Speaking of throwing money down the drain, what does it cost to have these cards? For debit cards, fees are generally charged when you spend more than you have in your account. These are called overdraft fees.

Credit card fees, on the other hand, are a lot more common. Types of credit card fees include:

  • Annual fees
  • Over-limit fees
  • Late-payment fees
  • Interest on outstanding balance

Luckily, if you use your credit card responsibly and pay your bill on time, you can avoid most of these.

Credit Score

Building a good credit score, cannot be stressed enough. It is incredibly important. Whether you are trying to buy a home or borrow money to start a business, you will need good credit. How do debit and credit cards affect this? Well, debit cards do not, but credit cards are vital in helping you build good credit.

By paying off your credit card and monthly bills on time, your credit score improves. This increases the trust that lenders have in you as an individual.

Similar, Yet Different

Credit cards and debit cards have many similarities. They eliminate the need to carry cash, and not to mention, look almost identical — each with 16-digit card numbers and expiration dates.

However, remember, the two cards are actually quite different. Both credit cards and debit cards have their own unique benefits. So next time you open your wallet, think about which card would be best for your purchase!


Credit Cards 101

How do credit cards work, and how are they different from debit cards?

Credit cards offer convenience, consumer protections and a quick way to build good credit, assuming you use them responsibly. Use them unwisely, and your credit can suffer, which affects your ability to borrow money in the future.  Understanding how credit cards work will help you choose the right cards for you, manage them well and save money.

See 2021’s best credit cards for cash back, rewards and more. All backed by tons of nerdy research.

How Do credit cards work?

When you’re approved for a credit card, the bank authorizes a credit limit — the maximum amount you can borrow — to be used at your discretion. Your credit limit will depend on such factors as your income, your other debts and how much available credit you have on other cards.

Payment networks — Visa, Mastercard, Discover and American Express — process credit card transactions. They make sure that the money for the purchase gets to the merchant and that the correct cardholder gets billed.

When your bill comes, you have the option of paying a certain minimum amount, paying the whole balance in full, or paying some amount in between.

Paying just the minimum every month is ultimately the most expensive option, since it will cost you the most in interest.

Paying in full is the best option; when you pay in full each month, you get a grace period that allows you to avoid paying any interest on purchases at all.

Your credit card issuer reports your payments to the credit bureaus, the companies that prepare credit reports. Your payment history counts for 35% of your credit score — a three-digit number that indicates how risky it would be to lend you money. You must pay at least the minimum by the due date every month to avoid late fees and potential damage to your credit score.

How DO credit cards differ from other cards?

A debit card is linked to your checking account; debit card purchases automatically pull money your account. You're using your own money to pay for things rather than borrowing it. Some debit cards earn rewards, but they generally pale in comparison to credit card rewards. Debit cards also have weaker fraud protections.

A prepaid debit card isn't linked to a checking account; instead, you “load” money onto the card, and you can only spend as much as you've loaded.

These cards often charge many fees you wouldn’t pay with a regular debit card. Prepaid debit cards offer some protections, and they come with limitations.

For example, some prepaid debit cards don’t offer ATM access or mobile banking. Also, not all merchants accept them.

Neither debit cards nor prepaid cards will affect your credit scores, because using them does not involve borrowing money. Only a credit card will affect your credit score.


Rewards credit cards give you something back for each purchase you make. Generally, these cards require good credit. They come in different types:

  • Cash back cards give you money back. You can usually get that money as a check or a deposit into a bank account, or you can use it to reduce your balance.

  • Airline credit cards and hotel credit cards give you miles or points that you can redeem for free flights or stays with the card's partner airline or hotel chain. How you redeem your rewards on these cards might be subject to restrictions, such as dates when you can't travel.

  • General travel cards give you points that you can use to pay for any travel expense. They're more flexible than branded airline or hotel cards.

  • Store credit cards reward you for loyalty by giving you discounts or other benefits for shopping at the store that provided the card.

Rewards cards are ideal for cardholders who pay their bill in full every month. When you carry a balance, interest charges nip away at the value of rewards.


Low-interest cards don't give you rewards; instead, they provide value with a lower interest rate, making it less expensive to carry a balance. Many times, these cards will come with a 0% introductory APR period, giving you time to pay off a large purchase without interest. You usually need good credit to qualify.


A balance transfer credit card lets you move your debt from another issuer to take advantage of a lower interest rate. Generally, these cards require good or excellent credit.


Credit card options for those with less-than-good credit are more limited. Rewards are more scarce, and interest rates are higher. Use these cards to improve your credit so you can qualify for better offers down the road:

  • For bad credit, your best option is usually a secured credit card. These cards require a security deposit that you get back after closing the account or upgrading to a regular, unsecured card. In the long run, a secured card is less expensive than unsecured credit cards for bad credit, which tend to charge high fees that, un a security deposit, you never get back.


Being a college student doesn’t automatically qualify someone for a student credit card. The Credit Card Act of 2009 prohibits issuers from giving cards to people under 21 unless they have proof of income or a co-signer, someone willing to put their credit on the line to help the applicant build theirs. When that’s not an option, a secured credit card is a way to establish credit.

Reasons to get a credit card

Debit cards are appealing because they don’t involve borrowing money and won't rack up debt — but they also don't help you establish a credit history. Building credit is one of the key benefits of using a credit card. Others include:

Sign-up bonuses. The bonus could help you start an emergency fund (in the case of a cash back card) or take a trip.

Ongoing rewards: Rewards give you back some of the money you spend.

Building credit: Establishing a good payment history can help you borrow money in the future at lower rates.

A 0% introductory APR period: This lets you avoid interest on purchases or balance transfers during a promotional period.

Flexibility: Though it's best to always pay your balance in full each month, a credit card allows you to pay for things over time, which helps when you have a major purchase to make or a financial emergency.

Costs of carrying a credit card

Credit cards can come with costs, but you can avoid most of them with responsible use. They include:

Interest payments: Credit cards can have different interest rates, or APRs, for purchases, cash advances and balance transfers. When you pay in full every month, your purchases don't accrue interest.

Annual fees: Some cards charge annual fees, from around $20 to hundreds of dollars. An annual fee can be worth paying if the card gives you rewards and perks that make up for the cost, but in most cases, you shouldn't pay a fee just for the privilege of having the card in your wallet.

Late payment fees: The cost varies by issuer, but federal regulations limit how much late fees can be. As of 2018, first-time late fees were capped at $27; and fees for a second late payment within six months were limited to $38. Late fees also can’t cost more than the minimum payment due.

Balance transfer fees: Generally, balance transfer credit cards charge 3% to 5% of the amount of debt transferred. Some cards waive the fee when you transfer debt within a certain time frame.

Foreign transaction fees: Most cards add a surcharge of 1% to 3% on transactions made with non-U.S. merchants. Travel credit cards generally don't charge these fees, and some issuers don't charge them on any of their cards.

Tips for effective credit card use

The benefits of using a credit card responsibly outweigh the costs. Here are some good practices to adopt:

  • Pay your bill on time and in full every month

  • Keep your balance below 30% of your available credit

  • Wait at least six months between credit card applications

  • Review your account online weekly to track spending and avoid fraud

Using a credit card responsibly is an easy and efficient way to establish healthy credit. You’ll be thankful that you did so when you're able to borrow affordably in the future.


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