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What’s the Difference Between a Credit Card and a Debit Card?

What’s the Difference Between a Credit Card and a Debit Card?
Though they’re both made of plastic and can be used for payments, credit cards and debit cards have a number of important differences. (Adobe Stock)

Though they’re both made of plastic and can be used for payments, credit cards and debit cards have a number of important differences — which can make a big difference for your finances. Dawn Lyons, a Vice President and Branch Manager at Hills Bank, says it’s a good idea to have both a debit and credit card in your wallet. Here’s why:

Debit and credit card basics

“A debit card is linked directly to your checking account, so when you make a purchase, those funds are coming directly out of your balance,” Lyons said. “However, a credit card has a set limit, which is based on factors like your credit score and annual income.”

That credit limit could be more than the amount of money you have on hand at any given time. But you shouldn’t use it as an excuse to spend as much as you want. “Each month, you’ll receive a bill to pay the credit card off in full or make a partial payment — but it’s important to understand that if you don’t pay your bill in full, you’ll accrue interest on the unpaid balance.” Lyons said. “That can add up to a lot of debt over time.”

Getting cash from ATMs

Debit cards are designed to get cash from a variety of ATMs with a small fee or even no fee when used inside certain ATM networks. But Lyons cautions against using credit cards at ATMs if it isn’t necessary.

“ATMs typically treat withdrawals using credit cards as a ‘cash advance,’ which can come with significant fees.” She said. “You’ll probably end up paying more than the value of the cash you withdrew to pay off your bill.”

Credit card benefits

Lyons recommends having a credit card for a number of reasons. “It’s a great way to start building your credit, as well as to protect your money, since a credit card is not linked directly to your bank account,” she said. “Certain cards can also offer rewards in the form of cash back or ‘points,’ which can be used for travel, gifts, etc.”

The key to building credit with a credit card is to use it responsibly, Lyons explained. “If you pay your balance each month and keep your overall credit utilization low — that’s the percentage of your credit limit that you use each statement cycle — you can improve your credit score to get better credit offers in the future,” she said. “But if you don’t pay off your credit cards, you not only will have to pay more in interest; it can make your credit score drop.”

On the flip side, Lyons added, using a debit card for your purchases won’t impact your credit score, for better or worse.

Should I have both a debit and credit card?

When you’re deciding whether to apply for a credit card, consider things like the annual fee (if applicable), the interest rate, the potential perks of the credit card, and most importantly: your spending habits. “Do you have the ability to pay off your credit card balance each month, or do you see yourself carrying a balance?” Lyons said. “Be honest with yourself to make the right decision.”

Deciding between a credit card and a debit card doesn’t have to be either-or, of course. Many people choose to use a debit card for everyday purchases and withdrawing cash, while using a credit card for bigger ticket items to pay them back over time and earn cash back or rewards.

If you’re trying to find the best option for your spending, Lyons recommends stopping by a local financial institution. “At Hills Bank, we help answer everyone’s questions about cards to help them find a solution that works for their needs,” she said. “Whether you’re a customer or not, feel free to stop by a location near you!”

Hills Bank Member FDIC