Credit vs debit cards: key differences and when to use each
Credit and debit cards may look identical, but they actually function very differently. Knowing how they work can help you choose the right option for different situations.
How credit and debit cards work
Credit Card
A credit card allows you to borrow money from a lender to make purchases, with the option to repay later. If you don’t pay the full balance each month, you’ll be charged interest.
Things to know:
Spending limit: this will be based on your credit limit and you should spend below it
Repayment: you must make at least a minimum payment each month
Interest: you will be charged this percentage on top of what you owe, if you don’t pay in full
Debit Card
A debit card is linked directly to your bank account. You can only spend money you already have, ie. your salary.
Things to know:
Spending limit: this will be your available bank balance from what you’re paid from your employment etc.
Repayment: no repayments are needed as you will be spending your own money
Interest: no interest is accrued, since you’re not borrowing money
But, if you end up spending more than what’s available on your debit card, there are a few different options that could occur:
- Payments get declined
- You enter an unarranged overdraft
- You enter an arranged overdraft
Overdrafts might also be unarranged which then cause you to start accruing interest, so it’s vital you check this in advance.
Key differences between credit and debit cards
Feature | Credit Card | Debit Card |
|---|---|---|
Source of Funds | Borrowed from a lender | Your own bank account |
Interest Charges | Yes, if balance isn’t repaid in full | No interest |
Credit Score Impact | Helps build credit history | No effect on credit score |
Purchase Protection | Section 75 protection on purchases over ÂŁ100 | Limited protection |
Overdraft Feature | No (but can exceed the limit) | Yes, if your bank offers one |
Fraud Protection | High protection | Varies by bank |
When do you use a credit card vs. debit card?
Credit cards tend to be better for:
Large purchases (for purchase protection)
Building your credit score
Booking hotels or car rentalsÂ
Use a Debit Card for:
Everyday expenses (to avoid debt)
Withdrawing cash (to avoid credit card fees)
Staying within budget (direct debit set up to pay a set amount back each month)
In conclusion, both credit and debit cards are useful, but they do serve different purposes. If used responsibly, a credit card can provide added security and rewards, like an increase in your credit score, while a debit card helps you stay within your financial limits.
This blog is for informational purposes only and does not constitute financial advice. Please speak to a qualified financial adviser before making financial decisions.