When it comes to the cards you can carry in your wallet, there are two main types: debit and credit. They look the same and even carry some of the same information, like your name and the card’s account number. Most retail locations accept both types of cards, and you use them in the same way: swipe or insert the chip into a card reader. But while there are a few similarities, there’s one big difference between debit and credit cards you should understand.
The difference is in how the two cards draw money to complete a transaction. Debit cards are tied to a checking or savings account and pull funds from those accounts when you use the card to make a purchase. When you use your debit card, the money is deducted from the funds in your account. The money in your account is deposited by you; whether it’s from the paycheck for your after school job or the birthday check you received from Grandma.
A credit card, on the other hand, represents a line of credit. Essentially you are borrowing money from a lender to be paid back later. When you swipe a credit card to complete a purchase, the cost is charged to that line of credit and becomes part of your balance (that you periodically need to repay, potentially with interest).
To better understand the difference between debit and credit cards, check out the chart below:
|Debit cards||Credit cards|
|Work like cash.||Allow you to borrow money for a short period of time.|
|Draw money from your bank account to complete a transaction.||Charge the amount of the transaction to your line of credit.|
|Place funds on a hold until the transaction is finalized and the purchase posts to your bank account.||Put your charges on your credit card balance (which is due at a later date); no money leaves any of your accounts until you make a payment toward your balance.|
|Do not result in bills to pay later; the money you used to make your purchase is electronically deducted from your bank account.||Result in a monthly statement and bill with your charges from the statement period; you need to pay your bill before the due date.|
|You are assigned a daily dollar spending limit. You should always ensure you have the available funds in your account to complete a purchase.||Allow you to finance a purchase and pay it off (with interest) over time instead of paying for it in full; the amount you can charge is determined by the credit limit of the card.|
|There may be fees associated with overspending and not having enough money in your account.||Allows you to charge more to your line of credit than the amount of cash you have available to pay your credit card bill when it arrives. Pay the minimum payment to avoid penalties. If you can’t pay your entire balance, the balance revolves, and you incur interest charges until you pay off the balance.|
|If your debit card or card information is ever used without your permission, you are not liable for promptly reported unauthorized card transactions.||If your credit card or card information is stolen, with Wells Fargo you will be 100% covered.|
Latest posts by Dana Fulton (see all)
- My story: Why living at home/on campus was worth it - January 15, 2019
- Infographic: How should you spend your time preparing for the SAT? - January 14, 2019
- Parents: Is your teen ready for a credit card? - January 11, 2019