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Difference between Credit Card & Debit Card

They may look similar when they’re sitting snugly in your pocket, but put them to use and they’ll behave very differently indeed. Are you clear when you should reach for your credit card and when you’d be better off diving for your debit card?

If your knowledge on the topic is more muddled than a Cuban mojito, take a seat and repeat after me: “the differences between credit and debit cards will no longer be a mystery”.

Now, let’s get started...

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Debit vs credit card: as you spend

When swiped, a debit card takes money from your bank account instantly. It may take a few days to physically leave your account, but there’s an immediate check on whether you have the funds in your account or sufficient-agreed overdraft to cover your purchase. If you don’t, the card issuer will decide whether they’ll allow the transaction to go through and issue any relevant charges.

Credit card vs debit card: points to consider

  • The funds
  • The fees
  • Your spending style
  • Consumer protection

The funds

With a credit card, the money doesn’t move quite so quickly, though you could still have a transaction refused if you’ve maxed out your credit limit. Perhaps the biggest difference is that with credit cards, you’ll pay interest if you don’t pay back the money you’ve used within an agreed period of time, sometimes up to 55 days.
After this point, your interest is backdated so that you pay interest from the original transaction date and the amount you’re charged is based on your APR. If you’ve got a 0% purchase card you won’t need to pay interest on your balance for much longer – maybe months or even years, but you will need to make monthly payments of at least a minimum amount.
In contrast, with a debit card, you’re spending your own money, so unless you go into your agreed (or unagreed) overdraft, there’s no interest to pay. Definitely worth considering in the debit vs credit card debate.

The fees

Both types of plastic are widely accepted, though some retailers may enforce a minimum spend on either type of card to ensure the cost of processing your payment is worth their while. Credit card surcharges, whereby you’re asked to pay a percentage of the total transaction as an additional fee for paying by credit, are something to watch out for but are due to be phased out by law on January 13th, 2018 .
Both debit and credit cards can usually be used abroad with fees associated for doing so, though if you have a special overseas credit card without foreign exchange fees it can work out considerably less expensive.

Your spending style

As a general rule, credit cards shouldn’t be used for everyday spending. If you’re using them to plug the gap between your income and outgoings, this could result in your debts spiralling like a magic carpet in a desert typhoon. But if you’ve bagged a credit card with cashback or other reward schemes, you may want to use it to pay for everything from your lunch to the petrol in your car in order to earn more rewards. Ensure you spend what you would anyway and don’t leave a balance on the card.
Because they’re connected with your bank account, debit cards and their use can also come with perks – some offer discounts with particular retailers, for example. However, when it comes to withdrawing money from an ATM, doing so with a credit card is a real no go.
On the whole, withdrawing your own cash from an ATM with a debit card is free unless you’re using a charged ATM or going into an arranged overdraft by doing so. But if you use a credit card to make what is called a cash advance, not only could you face a fee plus high interest whether you clear your balance in full or not, but you could also damage your credit score.

Consumer protection

You can check out the Money Guru Consumer Purchase Protection guide for in-depth enlightenment when it comes to the potential backup from your plastic that can provide peace of mind.

As a starting point, it’s good to know that credit cards offer cover under Section 75 of the Consumer Credit Act. This means when you purchase or pay towards goods costing between £100 and £30,000, your card provider is jointly responsible for the transaction and could be called upon to pay for refunds or repairs if goods don’t turn up or aren’t up to scratch if retailers and service providers go bust or won’t cooperate.
You may find that individual cards have other forms of consumer protection built in too. Chargeback is a scheme that applies to debit cards and is voluntarily signed up to by some credit card issuers. This covers purchases under £100 and over £30,000. It relies on your bank to reverse a transaction which can take some time.

Credit v debit comparison: what works for you?

For some people, having a credit card is too much of a temptation to spend money or you may already have debt and adding to it would make issues worse. At the other end of the spectrum, this type of borrowing can sometimes have benefits, provided you’re managing debt wisely or clearing it completely.

You’ll likely already have realised that you need a really good credit rating to secure the very best credit card deals, but did you know your credit rating can also affect your ability to get a debit card? Those who have been declared bankrupt or insolvent can find it difficult to get access to a bank account and therefore a debit card, which is essentially a bank account feature.

How you use your credit or debit card can have an impact on how credit worthy you are judged to be by lenders. In turn, this can decide whether you can get certain products. There’s also a lesser known third choice – a prepaid card can sometimes help those without a bank account and also offer options for those travelling abroad. Do you think a prepaid card could bring good karma for you?

If you’re looking for more information before making your decision, see our guides to understanding credit cards, which credit card is best for me or find alternatives to credit cards here.