Here’s one of those money things you feel like you’re supposed to understand, so you never ask the question…
What the heck is the difference between debit and credit cards?
Some of you might have no idea. Some of you might think it’s obvious. Wherever you stand, I bet there are a few things you don’t know about how your debit card affects your bank account.
If you have a checking account, you probably carry a debit card in your wallet. It’s probably the same shape and size as a credit card, and it probably even bears the Visa or Mastercard logo on the front.
But it’s significantly different, and lots of people don’t know exactly how.
Here are four facts you might not know about those powerful pieces of plastic.
1. Credit and Debit Cards: Not the Same Thing
Let’s start with some basic definitions.
Laura Adams of the Money Girl podcast defines credit and debit cards:
- A credit card allows you to make purchases using borrowed money that you have to pay back with interest over time.
- A debit card allows you to make purchases using your own money that’s linked to a bank checking or savings account.
In other words: When you pay with a debit card, it automatically deducts the money from your checking account.
When you pay with a credit card, you’ll get a bill at the end of the month. If you don’t pay it in full, the charge sits on your account and accumulates interest until you pay it off.
Here are some examples of different types of credit and debit cards:
- For freelance work, I receive payment via a prepaid Payoneer Mastercard debit card. I don’t have an associated bank account — the client just loads my payment on to the card through Payoneer, and I can use it for purchases or ATM withdrawals.
- My Aspiration account comes with a Mastercard debit card that I can use to make purchases and withdraw money from ATMs anywhere in the world. The money comes directly out of my checking account, and Aspiration refunds ATM fees each month.
- An online Chime spending account comes with a Visa debit card that you can use to make purchases and withdraw money from ATMs. The money comes out of your account, and you can enroll in automatic savings, to round up purchases and pad your connected savings account.
- The Chase Freedom Unlimited credit card. Its claim to fame? You’ll earn an unlimited 1.5% cash back on all your purchases. Plus, if you spend $500 in your first three months of opening the card (hi, groceries), you’ll pocket a $150 bonus.*
2. Your Card Might Say “Visa,” but It’s Not a Credit Card
Here’s what baffles me. I don’t have a credit card, but I do have a debit card linked to each of my checking accounts. And all of my debit cards have a Visa or Mastercard logo on them.
What do those companies have to do with me and my bank accounts?
Mastercard and Visa are like the go-betweens that process transactions for banks. Businesses that accept them as payment are part of their respective networks.
Say I make a purchase at Publix, my local grocery store. I use my debit card from my Aspiration account. Publix manages its money at, say, Anytown Bank Corp.
I swipe my card, and Mastercard’s job is to let Aspiration and Anytown Bank Corp. know about the transaction. So my money is debited from my account and credited to Publix’s account.
That’s the kindergarten version of the explanation. Picture me in a dinosaur costume on set with a mini town. That’s as far as I want to go into this web of finances floating around the ether.
3. Processing As “Credit” — Nope, Still Not a Credit Card
Here’s where the distinction becomes hazy: What does it mean to run a debit card transaction “as credit”?
When you make a purchase with your debit card, the cashier — or the machine — usually offers the option to run it as “debit or credit.” Here’s the gist:
- If you run the transaction as debit, you’ll enter a PIN to confirm it.
- If you run the transaction as credit, you’ll sign to confirm it.
What does the difference mean for your wallet?
Regardless of which way you process the transaction, the money you spend on your debit card will come out of your checking account. You can’t actually use a debit card to buy something now and pay later, like a credit card.
The major difference you’ll notice is in security.
As Adams explains, your debit or ATM card is protected under the Electronic Fund Transfer Act (EFTA). Under this law, your liability for fraudulent charges depends on how soon you report it.
- Report within two business days, and you’re responsible for up to $50 in fraudulent charges.
- Report within 60 days, and you’re responsible for up to $500.
- If you still have the card in your possession, you’re not liable for anything as long as you report it within 60 days after you receive a bank statement.
- If you wait more than 60 days to report the charges, your liability is unlimited, including overdraft fees or other penalties from your bank.
That’s why your debit card comes with a personal identification number (PIN). A thief might snatch your card or number, but if they don’t know your PIN, they can’t complete a purchase at the register (assuming the cashier does their job and checks ID and requires a signature for a non-PIN purchase).
Credit cards, on the other hand, are protected under a law called the Fair Credit Billing Act (FCBA), which says you’re never responsible for more than $50 in fraudulent charges.
Some people think FCBA protections extend to a debit card when processed as credit — that’s not true.
However, processing your debit card as credit could offer additional protections under Visa and Mastercard’s policies.
Visa debit cards are extended the security of Visa’s Zero Liability Policy. The company’s site says, “If your Visa Debit card is lost or stolen and fraudulent activity occurs, you are protected by Visa’s Zero Liability Policy. That means 100% protection for you.”
It adds, however, “Visa’s Zero Liability policy does not apply to certain commercial card and anonymous prepaid card transactions or transactions not processed by Visa.”
That last part means Visa doesn’t have your back if you process the transaction as debit. So if a thief gets hold of your card or card number and your PIN, they could run up charges on the card that you’ll be liable to pay under the terms of the EFTA.
Mastercard protects you from fraudulent debit purchases with similar Zero Liability Protection.
4. Credit Transactions are More Expensive for the Merchant
One other major difference between running your card as debit versus credit is how much it costs the business. Each transaction comes with a fee that goes to the card issuer, the financial institution and others.
Those fees tend to be higher for credit card transactions, especially those with great rewards. If you want to help your favorite local merchant save money, choose debit to reduce their fees — or pay in cash.
Annual Rewards amounts will change based on the amounts you enter. The monthly spending category names and definitions may vary among issuers, and categories may not align one-to-one.
The information for the Chase Freedom Unlimited card has been collected independently by Codetic. Opinions expressed here are the author’s alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. Codetic is a partner of Credible.
Dana Sitar ([email protected]) is a senior writer/newsletter editor at Codetic. Say hi and tell her a good joke on Twitter @danasitar.