Debit vs. credit card: Key differences & when to use each

• The key difference between debit and credit cards is where the money on the cards comes from.
• Debit cards are linked to checking accounts, and each transaction uses the checking account balance to pay vendors.
• Credit cards are not linked to a checking account. Each transaction functions like a small revolving loan from the issuer that cardholders must repay.
• Credit card companies charge interest on the balance carried from month to month, while debit cards typically don’t charge interest.

While credit and debit card payments are used for checkouts, each type of card works differently for in-person and digital transactions.

Understanding the key differences between debit vs. credit cards can help people make informed financial decisions. For example, credit cards may help individuals build credit and gain rewards, while debit cards may make it easier to stick to a budget with clear spending limits.

Here’s a quick overview of what debit and credit cards are, when to use each, and how each card type can benefit a person’s financial situation.

Table of contents

• What is a debit card?
• What is a credit card?
• When might someone use debit vs. credit?
• Earn rewards with PayPal cards
• Frequently asked questions

What is a debit card?

Debit cards are payment cards that link to a person’s checking account at a financial institution like a bank, credit union, or a banking alternative. These cards let people make purchases without using cash.

When banks process these transactions, they withdraw the purchase amount from the linked checking account and transfer those funds to the merchant. Since banks link debit cards to checking accounts, account holders must use a personal identification number (PIN) to initiate the transaction. This is for security purposes and helps reduce the risk of fraud and scams.

Though most debit cards work the same way, there are several types of debit cards that people should know about. This includes the following:

• Standard: A common type of debit card that is linked to a checking account. Individuals often use these cards to build good money habits, make payments, or withdraw funds.
• Electronic benefits transfer (EBT): EBT cards are government-issued debit cards used for approved purchases only and typically reloaded once a month.
• Prepaid: Prepaid debit cards aren’t linked to a checking account. Instead, people deposit funds directly onto the card. Prepaid cards may offer additional flexibility beyond a standard card.

What is a credit card?

Credit cards let people make purchases online and in stores without using cash, but they aren’t tied to a checking account. Instead, cardholders can borrow money from the card issuer, up to an agreed-upon credit limit (the maximum amount a cardholder can borrow).

Even though these cards aren’t linked to a bank account, some options offer credit card fraud detection and additional security benefits.

As with debit cards, there are several types of credit cards people should know about before applying for a card. This includes the following:

• Standard: Standard credit cards have credit limits and minimum monthly payment expectations. These cards can be used for regular purchases and cash advances (for a fee).
• Rewards: Rewards credit cards help cardholders earn rewards on purchases. These options, like the forthcoming PayPal Credit Card, offer various rewards from cash back to airline miles, depending on the card.
• Premium: These cards offer luxury rewards and perks like airport lounge access, travel advantages, and other similar benefits.
• Balance transfer:  Balance transfer credit cards allow people to roll the balance of one or more existing cards onto a new credit card, ideally with a lower interest rate or a low introductory rate.
• Secured: Secured credit cards can help people qualify for other credit cards by helping build their credit history. Credit limits for these cards are customizable, and the cards are reusable.
• Charge: Charge cards are credit cards with no set spending limit, but cardholders must repay the balance in full each month.

When might someone use debit vs. credit?

Both debit and credit cards can help people make purchases with ease. However, one may be better suited to certain transactions than the other. Here are a few instances when people may want to use a credit card and when a debit card may be a better option.

When a debit card is useful

Since debit cards are often linked to checking accounts, users may want to use these cards when they:

• Need to withdraw funds at a traditional or cardless ATM
• Want to avoid debt and interest charges
• Are looking to avoid annual fees

With debit cards, cardholders don’t have to borrow and repay money when making a purchase.

When a credit card is useful

As long as cardholders spend responsibly, credit cards may be a better option for:

• Building credit and credit scores
• Establishing a borrowing and repayment history
• Paying for recurring expenses like subscriptions and streaming services