Debit cards versus credit cards

Janice Zerbe<rajzerj@msu.edu>, Michigan State University Extension - September 29, 2015

Do you know the difference between debit cards and credit cards?

There could be trouble when a teen asks, “How do I know if I have a debit card or a credit card?” Luckily, Michigan State University Extension 4-H Youth Development has resources to help answer these questions. First, you must understand the basics. Debit cards and credit cards are both ways to access money without having to carry around cash or a checkbook. They both look almost identical with a 16-digit number, expiration date and a CSV code on the back. This is where the similarities stop.

Debit cards are like digitized version of checks. They are linked to your bank account, typically checking account, and money is withdrawn from your account as soon as you make a purchase. Credit cards offer a line of credit that is interest-free if you pay it off each month on time. If a credit card is not paid off each month, there is typically interest that is added.

Credit card versus debit card comparison chart
	Credit card	Debit card
About	Credit cards are lines of credit. When you use a credit card, the issuer puts money toward the transaction. This is a loan you are expected to pay back in full (usually within 30 days), unless you want to be charged interest.	Any time you use a debit card to buy something, money is deducted from your account. With a debit card, you can really only spend the money you have available to you.
Connected To	Not required to be connected to a checking account.	Checking or savings account.
Monthly Bills	Yes.	No.
Application Process	Somewhat difficult, depending on one's credit score and other details.	Easy, with basically no barrier to receiving a debit card.
Spending Limit	The credit limit set by the credit issuer. Limits increase or stay the same over time as a borrower's creditworthiness changes.	However much is in the bank account connected to the card.
Interest Charged	If a credit card bill is not paid in full, interest is charged on outstanding balance. The interest rate is usually very high.	No interest is charged because no money is borrowed.
Credit History	Responsible credit card usage and payment can improve one's credit rating. Credit cards typically report account activity to at least one of the three major credit bureaus on a monthly basis.	Does not affect credit history.
Overdraw Fees	Low. Some credit card companies allow to overdraw amount over the maximum credit line with a fee.	High "overdraft" fees. Possible to overdraw amount over the account limit.
PIN	In the U.S., this is uncommon, but PINs are being phased in.	Usually.

*Chart from Debit Card vs. Credit Card, Diffen

This is just scratching the surface of information related to debit cards and credit cards. It is very important to understand what type of card you have before you start using it. For more information on the different types of credit and debit cards, see “Types of debit cards and credit cards.”

More information on money management topics can be found on the 4-H Money Management website or through the High School Financial Planning Program offered through the National Endowment for Financial Education. Money management refers to learning the basics of personal finance as a youth is a positive step toward a successful financial future.

This article was published by Michigan State University Extension. For more information, visit https://extension.msu.edu. To have a digest of information delivered straight to your email inbox, visit https://extension.msu.edu/newsletters. To contact an expert in your area, visit https://extension.msu.edu/experts, or call 888-MSUE4MI (888-678-3464).