The Difference Between a Credit Card and Debit Card

Credit cards are based on lending. When you use one to make a purchase, you're essentially taking out a pre-authorized loan from the bank or financial institution and are expected to pay it back with interest on a monthly installment plan. There is a spending limit, but as long as you make a minimum monthly payment, the credit card remains open and the interest continues to accrue. If you close the card, interest will still add up...over time, to a startling degree.

The most important difference between a credit card and a debit card is that using a debit card is more like writing a check –even if you use the credit option. The money comes directly out of your bank account. So while they are fast, convenient and usually require no identification aside from a pin number, losing track of the amount spent can be disastrous.

Whether one is better than the other is up to you. If you can carefully track your spending and stay within your budget, a debit card will cost less in terms of interest saved. Spending more than is in the bank, on the other hand, will incur hefty charges for insufficient funds, in the same way writing a bad check will. Another consideration is that the same features that make debit cards so convenient opens them up to fraud. If your debit card disappears, a clever thief can devastate your bank account quickly, and, while the bank is always willing to work with you, there is less recourse than with credit card fraud.

Stricter liability laws are in place for credit card companies. In the case of credit card fraud, you are liable for only the first $50, even if you don't notice it's gone until you get your statement. It's important to note that the law regarding debit cards is not the same. If you notify the bank within two days, your liability is the same $50, but after that, your financial liability increases exponentially as time passes. After the two days, liability goes up to $500, after 60 days, your liability can go up to 100%. Some banks have instituted voluntary limitations on customer liability, but not all, and they are not accountable to the same set of laws. It's in your best interest to know what your bank's policies are and how that applies to the potential loss of your debit card.

In addition to liability difference between a credit card and a debit card, credit cards also offer consumer protection on purchases; a built-in insurance policy against enroute delivery damage or defective merchandise.

The difference between a credit card and a debit card is marked, and each has advantages and drawbacks. Credit cards carry an inherent risk of overspending and creating insurmountable debt; debit cards spend more like cash, and should be treated with the same care, but will not impact your credit rating in the same way as a credit card. If you're trying to build credit and can control your spending, a credit card will be more helpful. If you want to avoid the pitfalls of credit debt and live strictly within your means, a debit card can be the wiser choice. Most people have both and use them for different reasons, and many find that using a hybrid approach - a debit card tied to a credit card in case of accidental overspending - the best way to go. Whichever way you choose, the important thing to remember is to track your spending and not use plastic as if it were a free money tree. Fit both credit card and debit card usage into your budget.