Debit cards vs Credit cards: What's the difference?

When it comes to your wallet, it's easy for all of the cards to start to blend together. If you've got yourself a debit card, you might start to wonder what makes credit cards different, and whether you need one or the other - or both! 

To help resolve any confusion, we've gone through and compared the two, from features to fees and everything in between.

Although they may look pretty similar, there is a fundamental difference between these two cards. This boils down to where the actual money comes from when making a purchase. 

What is a debit card?

A debit card lets you make purchases using your own money via a linked bank account. These often come with an everyday bank account.

What is a credit card?

A credit card lets you borrow money from the bank to make purchases, which you’ll need to pay back within a set period of time, to avoid adding interest to your bill.

There are many different kinds of credit cards, so you'll need to find the type that suits your needs (whether its paying down an existing balance or earning rewards points).

Access to funds

The main reason you'd keep this piece of plastic in your wallet is the convenience. Whether the cards are in their physical form or digitised through mobile payments, they'll usually be preferable to a pocket stuffed with a finite amount of cash.

So, let's take a look at how easy it is with each card type to access the available funds as well as some of the limitations you'll need to consider.

Debit cards - You will usually only have access to the funds which are in your own bank account, unless you have the option of an overdraft, which is an expensive way to access credit by letting you withdraw more than what’s in your account.

There’s also sometimes a withdrawal limit to consider. For example, if you have $3,000 in your account but your daily withdrawal limit is $2,000, then you won’t be able to spend the last $1,000 using your debit card.

Credit cards - You can only access as much money as the credit limit you qualify for. If you’re new to using a credit card or have a low credit rating, you might only be eligible for a lower credit limit.

This can increase as time goes on and you prove yourself to be a responsible borrower, but regardless of its size, you'll want to stay safely under the limit and pay back the funds in the agreed-upon period. This shows lenders that you can manage your spending and repayments and will help improve your credit score.

Fees & charges

You don’t want to wind up paying a bunch of extra fees while you spend or access cash. So, it's important to know about the different fees and charges that come with using both kinds of cards.

Debit cards - Generally, debit cards don't have an annual fee. However, the bank account it’s linked to might come with a monthly service fee, so be sure to investigate for fees on that front also.

You also won’t pay any interest with a debit card, making it a pretty cost-efficient way to spend money. But don't forget you might see a surcharge when using a debit card at some businesses, which can usually range from about 0.5% - 2% of the value of the transaction. For all the details, read our explainer on how businesses charge for EFTPOS 

Credit Cards - Credit cards can pack a real punch in the fees department depending on the kind of card you hold and which provider you've signed up with. The main extra charges to consider include annual fees, cash advance fees and the interest rate you'll be charged if you can't meet repayments within the interest-free period.

Like with a debit card, you could be charged a surcharge when using a credit card at some business. You'll usually find a credit card surcharge is a little higher (approximately 1-3%) depending on which card you have.

Rewards

Everyone loves a freebie, so why not pick up extra perks when you hit the shops? 

Debit Cards - Some debit cards do offer the option to earn rewards for making certain kinds of transactions (some offer points schemes, cashback on purchases and exclusive retail offers) but most don’t. So if you're in it for the freebies, a debit card isn’t likely to satisfy you.

However, you'll often see spending via a debit card as a condition for earning bonus interest on your savings account. This is more of a savings tool than a reward, but it is a good way to earn interest on your savings fund if you can meet the criteria.

Credit Cards - There are heaps of awesome rewards credit cards that offer everything from retail rewards and points that can earn you free airfares to complimentary travel insurance.

Keep in mind you’ll usually pay more in fees and interest to have one of these cards in your wallet. The ideal situation is to find an option that's affordable with features you are likely to use so you get the most value possible out of using it. 

Potential for debt

You don't want to saddle yourself with a bunch of debt next time you hit the shops. So, consider the debt-accruing potential  of debit and credit cards before heading out on a spree.

Debit Cards - One of the only ways you could potentially wind up in debt by using a debit card is if you’ve used the overdraft service, in which case you could face hefty fees and interest. If you use your card responsibly and opt-out of the overdraft service, you can’t really go into debt using your debit card since this scenario won't let you spend money that isn’t yours.

Credit Cards - It’s no secret that using credit cards irresponsibly can leave you with big bills. This happens when people forget or ignore the fact that a credit card is basically a loan that needs to be repaid each month to avoid interest being applied and debt potentially accruing.

Worried about winding up with credit card debt? Read our guide on how credit interest-free days work for a better understanding of how you can avoid accumulating debt.

Credit history

If you ever want to take out a home loan to buy a house or borrow money to finance other goals, then you’ll need to have a good credit history to get approved. Your current spending habits, including the methods you use to make transactions, can help you build that history (in both positive and negative ways).

Debit Cards - Your debit card statement itself doesn’t affect your credit history because you aren’t accessing credit.

However, the payments you make can have bearing on your creditworthiness. For example, if you use your card to pay bills and miss due dates, it can be reported to a credit or debt collection agency after a set timeframe and then added to your credit report. This can in turn bring down you credit score.

Credit Cards - Your credit card use will affect your credit history. Responsible spending – where you stay sensibly under your credit card limit and make repayments on time – can increase your credit score. This effectively helps build your reputation as a responsible borrower and puts you in a good position for loan approval down the line.

One the flip side, if you lose control of your credit card balance, it will reflect badly on your credit rating. Depending on the severity of the situation, this could prevent you from securing a loan later on.

Security

Having a credit or debit card tends to be safer than carrying a bunch of cash around in your pocket. You'll usually be able to cancel your card if it's lost or stolen to stop any further losses (the same can't be said for a lost wad of cash)  Having said that, debit and credit cards come with a few safety concerns of their own.

Debit Cards - Although having a PIN makes debit cards fairly secure, you do still need to take precautions as it’s a direct link to your money. If you lose your debit card, anyone can pick it up and use it (especially in the case of low-value contactless payments that don't require a PIN). However, if you alert your bank right away about a theft or fraudulent activity, most will reimburse you.

Credit Cards - There’s just as much chance that you’ll become a victim of fraud or theft with a credit card as with a debit card. Similar to debit cards, if you alert your bank or lender to fraudulent activity they'll be able to cover the transactions, as most have liability guarantees for this exact reason.

Application process

Just how hard is it to get your hands on one of these? Let's examine it a bit closer.

Debit Cards - When you sign up for a bank account, many providers will offer you a debit card to go along with it. Including this won't take up any additional time, as there usually aren’t any eligibility requirements when it comes to applying for a debit card.

Credit Cards - Credit cards, on the other hand, can be a little harder to acquire. In order to apply for a credit card, you’ll need to fill out an application and provide details about your finances, employment and income.

Some credit cards will have a minimum income requirement. This is because your credit card effectively gives you access to the bank’s money, so they want to know that you're a responsible borrower who can afford to pay it back. Check out our guide to applying for a credit card.

There's no straightforward winner in this argument! The option that suits you better will depend on your specific financial circumstances and what you are looking for in your wallet.

Debit cards are great for risk-free access to money you already have tucked away in your account.

Credit cards can be useful for earning rewards, building a positive credit history, and paying for big items when the funds aren't immediately handy (so long as you're able to cover the cost in the given time frame).

Which one is best for you will depend on your spending habits and what you want to get out of your card. You may even decide to have one of each to use for different situations!

If you decide to take out a credit card, make sure you're across all the essential info by reading our credit card guides before comparing credit card options on Mozo.

Decided to stick with a debit card instead? Below is a sample of some of the cards we research and compare at Mozo.