The Difference Between Credit and Debit Cards

While many people get their first debit card in their teens, they often don’t understand the difference between that and a credit card until much later.

Debit cards and credit cards are similar in terms of when people use them and how they look.

Generally, places that accept one accept the other; you can identify it by those little pictures on cash registers of Visa and Mastercard signs.

What happens when I use my card?

Part of the confusion between the two is that Visa and Mastercard power both debit and credit cards. They run the back end to make sure when you use the card to buy groceries the money actually moves between the bank and the store.  

A debit card can only be used to spend money you have in your checking account. It’s like what people used to use for. (Learn how to read and write checks.)

So if I buy groceries with a debit card, the money is deducted from my checking account and moved to the grocery store’s bank account. It may not be that second, but it happens.

When you get a credit card, however, the bank is essentially issuing you a line of credit. If I use the credit card to buy groceries, the bank pays the grocery store and adds the cost of the groceries to a list of what I already owe the bank. I then pay the bank back later.

Costs of each

If you don’t pay your credit card bill monthly, several bad results occur. You don’t get more money to spend on it, and you get hit with late fees or have to pay interest on the amount you owe.

If you pay your full bill every month, there’s little to no cost for using the card. But if you can’t afford to pay for everything you bought, the interest rate is very high and ends up costing a much more than just the price of the original items.

Credit cards have annual fees, but the real cost comes when you don’t pay your bill on time. You can end up paying 15-20% more just to the credit card company!

Most credit cards have some annual fee, like $100, but you can sometimes get free ones from a bank you already use. Debit cards, on the other hand, generally have no fees and only charge you if you overdraw your account – if spend more money than you had in your bank account.

Debit cards can also be used at an ATM to withdraw cash. Credit cards cannot.