Depending on what accounts you have, one card can sometimes leave you in a better state. Or, making payments on a certain card could mean paying fees or more interest.
We’ve looked at the important differences between credit and debit cards and put together this handy guide so you’re as clued up as possible.
So, how does a debit card work?
You’ll normally get a debit card with your current account. You can use this card to access the money in your account and make payments. This could be over-the-counter purchases or paying for services and goods on the phone or online. You can also use a debit card to withdraw money from an ATM.
Nearly all cards now use contactless technology, where you can pay in shops up to £100 by tapping your card. You can also pay using Chip & PIN by putting your card into a terminal and entering your PIN.
Important things to remember
- You’ll need to have available funds to pay by debit card.
- You won’t be charged any interest on these payments (apart from overdrafts or being overdrawn).
- Any payments made will show on your account immediately.
- If you need to use your debit card abroad, either for purchases or to withdraw cash, you might be charged.
If you have an overdraft on a current account and you make a payment that takes you overdrawn, you may be charged interest on the amount you’ve used.
Some current account providers will allow you to have an interest-free overdraft. This means you can use these funds without being charged interest. But, if you go over the overdraft limit you’ve agreed with your provider, you may also have to pay more penalty fees and interest at a higher rate.
When to use a debit card
Using a debit card can allow you to keep track of your spending. As the funds are taken from your account immediately, you can then see how much is available in your account and whether you’re able to buy other things. You can also usually avoid paying any fees or interest by using a debit card, although this may be different if you use an overdraft.
Debit cards can be a good choice for making small purchases - especially if you’ll be charged interest on buying the same thing with a credit card. You can also withdraw cash without paying a fee or interest when using a debit card.
What about credit cards… how do they work?
When you make a purchase with a credit card, you’re borrowing the money. You then repay that money to the card provider at a later date. Just so you know, you may be charged interest if you don’t clear your balance by the agreed time or you make a cash transaction.
Credit cards tend to be used for a few different reasons. They can be a good way to improve your credit score (when used responsibly) and can give more protection when making a purchase. Some credit cards also offer rewards - like points or cashback - although they could also come with a fee.
Credit cards – the key points
- The amount spent is borrowed from the provider.
- You may be charged interest on your purchases if you don’t clear them by the due date on your statements.
- If you withdraw cash, you may be charged interest on the amount you withdraw. There may also be a fee to pay (this could impact your credit score).
- Sometimes, there’s a monthly or annual fee.
When to use a credit card
There are a few situations where you might decide using a credit card is better than a debit card. For example, paying for an expensive item or holiday. With a credit card, you may be able to claim your money back if the item’s faulty or the company goes bust.
If you use your credit card responsibly and pay off the balance by your statement due date, it could help improve your credit score over time. Just so you know, credit cards for building credit can sometimes come with higher interest rates and lower credit limits.
How debit and credit cards differ
To make things a bit easier, we've shown the main differences below:
Debit cards
- You can buy goods and services using your current account funds or up to an agreed overdraft limit.
- You can withdraw cash from an ATM without charge (depending on the ATM and any overdraft on your current account).
- Some current accounts come with an annual or monthly fee. For this, you may get other benefits like insurance and cashback.
- There’s some protection for your purchases under the Chargeback scheme, which allows you to dispute payments and request a refund if goods or services are faulty, not delivered, or misrepresented.
- Debit card payments and purchases aren’t covered by Section 75 of the Consumer Credit Act.
Credit cards
- You borrow funds to make purchases (up to an agreed credit limit).
- You’re likely to be charged interest on these purchases unless you clear your full balance by your statement due date.
- There can be monthly or annual fees.
- You’re usually charged a fee and interest for ATM withdrawals (which can impact your credit score).
- Purchases between £100 and £30,000 are protected under Section 75 of the Consumer Credit Act and the Chargeback scheme. The £100 minimum amount applies to each item or set of items you buy, rather than your full statement balance. (Find out more about Section 75 and the Chargeback scheme).
- Section 75 offers protection when the company hasn’t supplied the goods or services or been truthful about the condition of the products they’re providing.
- There’ll be fees and charges if you miss a payment, make a late payment or go over your agreed credit limit (all of which can affect your credit score).
Debit card vs credit card - pros and cons
Both credit and debit cards can be good options in their own areas of spending – but there are benefits and drawbacks to both.
Debit cards
Pros
- No fees when you spend or withdraw from your available balance. But, if you have an overdraft and go overdrawn, you may have daily charges.
- Some cards don’t charge for spending abroad.
- A convenient alternative to cash.
Cons
- They often have less fraud protection than credit cards.
- Spending is limited to what’s in your account or what your overdraft is. Most overdrafts don’t come with an interest-free period for purchases - unlike credit cards.
- They don’t help build your credit score.
Credit cards
Pros
- Payment protection on potentially fraudulent purchases the cardholder doesn’t know about.
- Higher available credit than you might have on a debit card (as long as you can make the repayments and borrow responsibly).
- Potential access to rewards, cashback and points - depending on the provider.
- May help improve your credit score.
Cons
- There can be high rates of interest when you spend.
- There's the potential to overspend, possibly landing you in debt.
- Poor credit habits can hurt your credit score.
- Annual fees and cash withdrawal charges (the latter can affect your credit score).
FAQs
What about overseas fees?
Typically, credit card fees are higher than debit card fees when you buy things abroad. It can depend on a few factors though. For example, a merchant’s own currency conversion fees, the currency fees in the country you’re in or any extra charges with your credit card provider.
Is a credit card safer than a debit card?
Although you may build up debt, paying with a credit card is more secure. With debit cards, you’re risking your own money with no safety net, whereas credit cards offer payment protection. This helps stop payments to potentially fraudulent accounts.