Debit Card vs Credit Card: When To Use Each

The main difference between a debit card and a credit card is that a debit card withdraws money from your bank account to pay for purchases, while a credit card allows you to borrow it from your card provider.

What is a Credit Card?

A credit card is a financial instrument that allows you to borrow funds from your card issuer to facilitate purchases.

Each card comes with a predetermined credit limit, the maximum balance you can carry at a single point in time.

As with any loan, you must repay the money you borrow through a credit card each billing cycle, which spans about a month.

Following the end of each billing cycle, your card issuer will send you a statement outlining your transactions for the period, your balance owing, and the payment due date. 

To keep your account in good standing and avoid negative effects to your credit score, you must pay at least the minimum amount required by the due date.

The grace period is the time between the end of your billing cycle and the due date.

If you pay off your whole balance within this time frame, you’ll avoid all interest charges. 

However, if you pay only a portion and carry forward a balance to the next period, your account will incur interest.

Here are some of the benefits of using a credit card:

Good for Credit Building

A credit card can be a helpful tool for cultivating a positive credit history, which is a crucial prerequisite for gaining access to a wide range of other loan products.

If you use your credit card responsibly by diligently making timely payments over a lengthy period, you’ll likely notice improvements in your credit score.

Increased Spending Power

With even one credit card at your disposal, you can instantly give your spending power a boost.

Having ample access to credit is especially valuable should a financial emergency occur when you’re strapped for cash.

Opportunity to Earn Rewards

You may have the opportunity to earn points, miles, or cash back on eligible purchases depending on the type of credit card you have.

You can then redeem these for merchandise, statement credits, gift cards, travel-oriented expenses, and more.

Don’t Forget!

Each time you apply for a credit card, the issuing financing institution will perform a hard inquiry on your credit report.

What is a Debit Card?

A debit card is a payment card that deducts funds directly from your bank account when you use it to conduct a purchase or withdraw cash from an ATM.

Your financial institution issues a debit card to you when you open a chequing account with them.

The card is linked directly to your chequing account and sometimes your savings account, as well.

They also supply a PIN (or ask you to choose one), a numeric code that enables you to perform transactions.

Your bank imposes a dollar limit for daily transactions, including withdrawals.

Depending on your bank’s policy, you may have the ability to spend more money than what’s currently available in your account, up to a predetermined amount.

Essentially, your bank will loan you money to cover the shortfall.

This feature is called overdraft protection.

Below are some benefits associated with debit cards:

No Interest Charges

Unless your bank account goes into overdraft, you never have to stress over interest charges when using your debit card.

The money is deducted from your chequing account during each purchase transaction – there’s no borrowing involved.

Conversely, the average rate on a credit card is 20%.

Fewer Debt Problems

By relying primarily on debit transactions for your everyday spending, you can steer clear of the debt woes commonly associated with credit cards. 

A generous credit limit can entice users to charge more purchases than they can reasonably afford to pay, leading to potential future debt problems.

Good Credit Score Not Required

Credit card providers prefer to issue cards to borrowers with a credit score that hovers around 650, a requirement not all borrowers can satisfy.

There are no such barriers associated with debit cards.

Almost anyone can apply for one regardless of credit standing, employment status, income level, etc.

Fun Fact

There are no fees associated with Interac Online debit card purchases, and your bank will reimburse you for any fraudulent transactions that occur while using the service.

When to Use a Debit Card vs Credit Card

Specific scenarios warrant the use of a debit card over a credit card.

Here are some of the most common ones:

You’re heavily in debt.

If you’ve amassed considerable debt and are struggling to keep up with payments, it’s prudent to clamp down on credit card usage for a while.

Opting for debit card payments as much as possible will ensure your debt problems don’t worsen with increasing balances and interest charges.

You need cash immediately.

If you acquire cash through a credit card cash advance, you’ll get dinged with a fee, and hefty interest charges will begin accruing on your balance right away.

Alternatively, by withdrawing money from an ATM using your debit card, you’ll likely avoid all fees, and no interest will accumulate on your account.

You want to avoid paying a surcharge.

A merchant may tack a surcharge to a purchase transaction to cover the interchange fee incurred when processing a credit card payment.

This fee can range from 1% to 3% of the total price.

Using a debit card as your payment method can easily avoid this fee.

Lady holding her debit card and credit card

Visa Debit vs Credit Card

Unlike a standard debit card, a Visa Debit boasts superior security features.

A broader range of merchants also accept it, offline and online (essentially any location that accepts Visa-branded cards).

The primary difference between a Visa Debit card and a credit card is the source they pull funds from to facilitate purchases.

The Visa Debit card draws on money sitting in your bank account; the credit card enables you to borrow money from your card issuer. 

With a Visa Debit card, your spending limit is tied to your bank account balance and overdraft protection amount.

Conversely, a credit limit restricts the amount you can charge to a credit card.

In addition, a Visa Debit card doesn’t offer a rewards program, while a credit card typically does.

Prepaid Credit Card vs Debit Card

A prepaid credit card is a payment card that you need to load with funds before using.

It’s not linked to your chequing account, so you’ll be unable to use it to make purchases if its balance is zero.

On the other hand, a debit card is tied directly to your chequing account.

As a result, you can use it to make as many purchases as you wish, provided there are sufficient funds in your account.

Prepaid credit cards don’t offer any overdraft protection, but some allow you to garner rewards points, which you can usually redeem for statement credits.

A debit card generally permits you to overdraw your account but doesn’t offer any rewards program.

Frequently Asked Questions

  • Are credit cards safer than debit cards?
  • Is an ATM card the same as a debit card?

Mark is a freelance writer who specializes in covering personal finance topics related to investing, mortgages, credit cards, and more.

He is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.