Whether you’re making a quick coffee run, putting gas in your car, or buying an item online, there’s a good chance you might use a card to pay for your transaction. Many people have both debit and credit cards in their wallets, but have you ever stopped to think about the difference?

While both are convenient options for making purchases, they each have unique features.

The following guide will explain how each type of card works and discuss important pros and cons so you can make a confident decision regarding which card to use.

Debit Card vs. Credit Card: Key Differences

Debit and credit cards may look nearly identical, but the differences in how they operate can impact your finances. Here’s a quick breakdown of the key variables.

1. Source of Funds

Debit cards link directly to your bank account[1]. When you make a purchase with your debit card, the money is deducted from the account, limiting your spending to your account balance.

With a credit card, each time you make a purchase, you're essentially taking out a small line of credit from the card provider. The provider lends you the money and keeps track of your purchases. They send you a bill in the form of your statement, and you are responsible for paying these purchases back. You may have a minimum payment to make by a specified due date to avoid additional interest charges.

2. Spending Limits

When using a debit card, if you attempt a purchase that exceeds your account balance, your transaction may be declined. If you have overdraft protection, some banks may allow the transaction. However, this often comes with additional fees.

When using a credit card, your credit limit and associated terms of your credit card account will be provided by the card issuer. Exceeding the limit set may cause a declined transaction by the vendor and you could be charged over-limit fees. Check with your credit card issuer for details. Also, note that these actions may impact your credit score.

3. Building Credit History

Since a debit card does not involve any borrowing, it does not impact your credit history or credit score. However, credit cards can have a significant impact. When used wisely, they can bolster your credit score, but making late payments or maintaining high balances may bring your score down.

4. Rewards and Benefits

Credit cards often come with rewards programs, offering cash back, travel perks, and other benefits. Typically, you’ll earn rewards in the form of points for every dollar you spend using your credit card and can redeem the points for cash or merchandise. Some credit card rewards programs offer as much as 4% cash back on specific types of purchases, such as gasoline, and have other perks, like cell phone protection policies. Debit cards typically do not offer rewards programs, although some may offer cash back.

5. Security and Fraud Protection

While debit and credit cards prioritize your security, credit cards typically have more robust fraud protection policies. In most instances, you’re not liable for unauthorized transactions as long as you report them promptly.

Debit cards are also secure, but the protection against unauthorized transactions depends on timely reporting. It’s very important that you report unauthorized use immediately.

How Debit Cards Work

Debit cards offer the convenience of cash without having to carry around physical bills. They’re a popular choice for everyday purchases, allowing you to spend responsibly by only using the funds available in your account. Here’s a quick overview of a debit card’s primary features.

Transaction Mechanics

When you make a purchase with your debit card, the retailer’s system checks with your bank to confirm sufficient funds are available. If they are, the amount is immediately reserved or deducted from your account. Some retailers, like gas stations, may hold an initial amount until the final transaction amount is processed.

Spending Limits and Overdraft Fees

Your spending limit with a debit card is determined by the balance in your account. For example, if you have $500 in your account, that’s the amount you can spend unless you have overdraft protection. Some banks or credit unions may set daily spending or withdrawal limits for security reasons.

If you have overdraft coverage, the transaction may go through even if you don’t have enough money in your account, but you could be charged a fee. Without overdraft coverage, your purchase may be declined.

Security Measures

Debit cards come with security features, such as a personal identification number (PIN), which often needs to be entered during a transaction to verify your identity. Some purchases may require a signature, similar to a credit card.

Cash Access

You can typically use your debit card at an automated teller machine (ATM) to withdraw cash from your checking account. You can also get cash back at many retailers when you make a purchase with your debit card[2].

Lost Card Protocols

If your debit card is lost or stolen, it's crucial to contact your bank immediately. This will allow them to freeze your card and help prevent unauthorized access to your funds. Acting quickly may also limit your liability for unauthorized transactions.

Requirements To Obtain a Debit Card

To get a debit card, you typically need to have a checking account with a bank unless you've purchased a prepaid debit card. There are also often minimum age requirements, although this can vary by institution and account type.

Pros and Cons of Debit Cards

When deciding whether to use a debit card vs. a credit card, there are some important pros and cons to consider.

Pros of using a debit card:

  • Real-Time Spend Tracking: Your purchases are typically deducted from your account right away, helping you track your spending in real time.
  • No Debt Accumulation: Since you’re using your own money, there’s no risk of accumulating high-interest debt.
  • Overdraft Coverage: Banks may offer overdraft coverage, allowing transactions to go through even if you're slightly short on funds, but fees may be assessed.
  • No Credit Check Required: Debit cards usually don't require a credit check, making them accessible to those with no credit or a poor credit history.

Cons of using a debit card:

  • Doesn’t Build Credit History: Using a debit card won’t help you build or improve your credit score or credit history.
  • May Incur Overdraft Fees: If you have overdraft coverage, you could be subject to fees if you spend more than your account balance.
  • Potential Hold On Funds: Some vendors, like gas stations, might put holds on a set amount of money when you use your debit card. This could temporarily reduce your available balance.
  • Daily Spending Limits: Some banks set daily spending or withdrawal limits, which might be inconvenient for larger purchases.

How Credit Cards Work

Credit cards offer the ability to make purchases and pay for them at a later date, giving you flexibility and the potential to earn rewards. They provide an active line of credit where you choose how much to borrow in real time with a limit. When using a credit card, it’s important to understand the mechanics so you can make the most of their benefits and avoid potential pitfalls. Here are a few important things you need to know.

Transaction Mechanics

When you use your credit card, the merchant’s terminal requests authorization from the card issuer. If approved, the amount is reserved against your credit limit. After a day or so, the transaction is finalized, and the amount is added to your statement, awaiting monthly payment[3].

Spending Limits and Interest Accumulation

Credit cards allow you to borrow money up to a predetermined limit. Since it's a revolving line of credit, as you pay down the account, you can continue to make additional charges if needed. If you exceed the limit, your transaction may be declined, or if the issuer authorizes the additional charges, you may be charged an over-limit fee[4].

If you don’t pay off your account balance in full each month by the due date, interest charges could be applied. This is calculated based on the annual percentage rate (APR) set by the card issuer.

Security Measures

Credit cards typically come equipped with advanced security features. Many have fraud detection systems that alert you to suspicious activities. Your card provider may reach out to you to verify potentially suspicious transactions. To keep your card safe, avoid giving out personal information that is not already visible on your card. You may also be able to add additional transaction alerts on your card or lock it with an "easy lock" feature, which prevents it from being used until you unlock it again.

Lost or Stolen Credit Card Protocols

It’s important to notify your credit card provider immediately if you lose your card or it’s stolen.

Requirements To Obtain a Credit Card

Applying for a credit card typically involves a credit check. Lenders want to see your credit history and verify your income. If you have less credit history, you may consider a secured credit card. This requires you to put down a deposit, which determines your credit limit[5].

Pros and Cons of Credit Cards

Credit cards are versatile financial tools. When used responsibly, they can offer a range of benefits, but there are also some potential pitfalls to avoid.

Pros of using a credit card:

  • Build Credit History: Regular and responsible credit card use can help you establish credit history. This is vital for securing loans, mortgages, or even some job positions.
  • Rewards and Perks: Many credit cards offer rewards programs, cash back, or travel benefits. Some provide extended warranties on purchases, travel insurance, or special discounts.
  • Purchase Protection: Credit cards often come with added protections against fraudulent transactions. Some also offer protection against damaged or stolen purchases.
  • Emergency Fund: Having a credit card can help you pay for unexpected expenses in emergency situations.

Cons of using a credit card:

  • Interest and Debt Accumulation: If you don't pay off the full balance by the due date, you'll incur interest. If not managed responsibly, this can cause you to accumulate high-interest debt.
  • Fees: Credit cards may charge annual fees, cash advance fees, and late payment fees.
  • Impact on Credit Score: While responsible use can build your credit score, late payments, maxing out your card, or having too many credit inquiries can negatively affect it.
  • Complex Terms and Conditions: Credit cards can sometimes have complicated terms and conditions, making it important to carefully review your account agreement.

Debit Cards vs. Credit Cards: Which Is Right for You?

Debit cards are directly linked to your bank account, ensuring you only spend money you actually have. This can help you with budgeting and daily expense tracking. It also allows you to avoid accumulating debt. However, debit cards don’t help you build credit or accumulate rewards.

Credit cards give you the flexibility to buy now and pay later. They can help you build your credit history and may provide a robust rewards program.

However, it's critical to use them responsibly. As quickly as they can help build credit history, they can adversely impact your credit history even faster.

At PNC Bank, our specialists understand that each individual has unique financial needs. We offer a range of debit and credit card options, allowing you to choose a tailored solution. Contact us today to learn more.