Credit card vs debit card: making the right choice

Understanding credit cards

A credit card gives you access to money that you need to pay back later. Essentially, it’s a form of borrowing. You’re not spending your own money. Instead, you’re accessing credit, which can help spread the cost of large expenses.

Credit cards are offered by banks, building societies and other companies such as retailers and airlines. You’ll be able to see the name of the credit card issuer on the card, as well as the credit card network, such as MasterCard, Visa or American Express (Amex).

About two-thirds of UK adults (65%) have a credit card, according to the trade body UK Finance.

How credit cards work

Credit cards can be used to pay for goods and services. This can be done by tapping your card and making a “contactless payment” or you can type in your PIN. Credit cards can also be used to withdraw cash from ATMs – this is known as a “cash advance” – although there is usually a fee.

You can choose to pay back the money in full each month or pay a smaller amount (but make sure you pay off at least the minimum amount).

You need to be 18 or over and living in the UK to be eligible for a credit card. When you take out a credit card, it means you agree to repay the borrowed funds, plus any interest accrued, according to the provider's terms.

Benefits of using a credit card

Here are some benefits of using a credit card:

• Build your credit score: if used responsibly, a credit card can improve your credit score. A good credit score can give you more choice of financial products in future, including lower interest rates on loans and mortgages.
• Help with cashflow: a credit card can help you spread the cost of large expenses. You can opt to make lots of small payments over many months if you don’t want to pay your bill immediately.
• Payment protection: if you buy something costing between £100 and £30,000 and there’s a problem, your credit card issuer is jointly responsible, so you may be able to get a refund from them. This is called Section 75 protection.
• Rewards and cashback: some credit cards offer loyalty points, cashback or Air Miles. The more you spend, the more perks you get.

Drawbacks of credit cards

There are drawbacks with using credit cards, especially if you don’t make the minimum payments on time. Here are some drawbacks:

• Could lead to debt: credit cards can seem like “free money”, making it easy to overspend and rack up debt.
• Fees: there are various fees and charges, including penalties for missed payments or exceeding credit limits. ATM withdrawals normally incur a fee too.
• Can harm your credit score: If you miss a payment or breach your credit limit, this can lead to a bad credit score, making future borrowing more difficult and expensive. Even using close to your credit limit will have an impact. It’s best to use only 25% of your available credit.

Here’s a summary of the pros and cons of credit cards:

Understanding debit cards

A debit card pulls money out of your current account straight away. So, you are spending your own money, and don’t need to repay it.

If you have a current account with a bank or building society, you will almost certainly have a debit card to go with it.

Most people in the UK (more than 95%) have a debit card, according to UK Finance.

How debit cards work

Debit cards can be used to buy items in shops, online, or for withdrawing money at cash machines. They are a useful way to pay for things without carrying cash. Like credit cards, you can buy things using contactless payment, or by keying in your PIN.

It’s possible for children and teenagers (aged 11 to 17) to get a debit card, but it may have limited functionality compared with a debit card for an adult current account.

If you spend more than the money in your current account, you may incur a fee, and go into your overdraft.

Benefits of using a debit card

Here are some benefits of using a debit card:

• Free and easy (most of the time): most debit cards don't charge for making purchases or ATM withdrawals.
• Safer than using cash: if your card is lost or stolen, you can cancel it.
• Avoid debt: debit cards are a good way to live within your means as you’re only spending money you already have. Be careful about overspending and going into your overdraft though, as you may have to pay interest plus fees.
• Payment protection: debit cards offer a chargeback scheme, enabling customers to dispute a card transaction and request their money back if something goes wrong in the first 120 days.

Drawbacks of debit cards

There are a few drawbacks with debit cards, such as:

• Overdrafts: spending beyond your account balance can be expensive. Overdrafts often come with fees, plus interest of up to 39.9%.
• Doesn’t improve your credit score: debit card use doesn't affect your credit score, so it won't help in building your credit rating.
• Less protection: the chargeback scheme isn't legally binding, so it’s not as robust as the protection you get with credit cards.

Here’s a summary of debit card pros and cons:

Key differences between credit and debit cards

The key difference is that a credit card lets you borrow money to pay back later, while a debit card uses the money from your bank account straight away.

Most people get a debit card when they open a current account with a bank or building society.

In contrast, you must apply separately for a credit card, and not everyone is successful. Whether you can get a credit card depends on several factors, such as your income and credit score.

Credit cards versus debit cards

*Interest may be charged if you go into your overdraft

Spending limits

Spending limits differ on credit and debit cards. With a debit card, you can generally only spend what is in your bank account. If you have an overdraft, you can also use this money.

Some people go into their overdraft by, say, £50, when they need some cash to tide them over until they get paid or receive their benefits. But you can also get overdraft facilities worth several thousand pounds.

In contrast, a credit card has a spending limit that has nothing to do with the money in your bank account. The credit limit is the maximum you can spend on the card, set by your credit card issuer. The average credit card limit is between £3,000 and £4,000.

Credit builder credit cards have lower limits. If you breach the limit, you will likely incur a fee, and it will damage your credit score.

Impact on credit score

Regular spending with a debit card does not impact your credit score. However, if you go into your overdraft, this could affect it. If you exceed your agreed overdraft limit, or go into an unauthorised overdraft, this could harm your credit rating.

A credit card has a bigger impact on your credit score. Using it sensibly can boost your rating. This means making your payments on time and not using up too much of your credit limit.

But if you miss a payment, use up too much of the credit limits or, worse, breach your credit limit, this could harm your credit score. You can check your rating with the credit reference agencies (Experian, Equifax and TransUnion).

Buyer protection

The buyer protection on a credit card is more robust than on a debit card. Section 75 of the Consumer Credit Act 1974 means your credit card provider must take the same responsibility as the retailer if something goes wrong with a purchase.

Whether it's a holiday or a computer, if it cost between £100 and £30,000, your credit card is equally liable to put things right.

With a debit card, customers can use the chargeback scheme if something goes wrong in the first 120 days – if goods are damaged or haven't been delivered. However, this is not enshrined in law, and the exact rules depend on the debit card issuer.

When to consider each card type

Credit and debit cards can both be useful money management tools. However, the best one to use depends on your personal situation.

Types of purchase

If you’re making a large purchase, such as buying a fridge or booking flights, a credit card can help you spread the cost. The Section 75 protection will also give you peace of mind should anything go wrong.

Credit cards are also handy for travel bookings: some hotels and hire car companies only accept credit cards for reservations.

Financial position

If you want to improve your credit score, a credit card is more effective than a debit card. Used responsibly, a credit card can give your rating a nice boost. If you often struggle with cashflow and need a bit of extra time to pay off your expenses, a credit card can also help with that.

However, if you struggle to manage your money and are sometimes tempted to overspend, a debit card could be a better choice. That’s because you’re less likely to get into serious debt with a debit card.

Attitude to risk

If you’re risk-averse and want to keep a lid on your spending, a debit card could be the best choice. You’re less likely to get into debt, or stung by fees and interest, with a debit card.

Having said that, if you’re worried about something going wrong – such as buying a pair of expensive trainers from a website that turns out to be a scam – a credit card will give you more protection.

FAQs: credit and debit card usage

Is it safer to use a credit or debit card online?

A credit card will give you more protection and is therefore safer to use online than a debit card.

If you’re buying something between £100 and £30,000, Section 75 means your credit card provider is jointly liable with the supplier for any faulty purchases. If the supplier goes out of business and you don’t receive the goods you paid for, you can also ask your credit card provider for help.

The National Cyber Security Centre recommends using a credit card for online payments. It says: “Using a credit card (rather than a debit card) means that if your payment details are stolen, your main bank account won’t be directly affected.”

Can using a credit card too often damage my credit score?

If you’re making the minimum payment but it covers all or most of your balance, then your credit score is unlikely to be affected. If you’re well within your credit limit and paying off the balance in full every month, it could have a positive impact on your credit score.

However, if you've used up a lot of your credit card limit and make only the minimum payments, lenders may think you're struggling to repay the debt. In that case, your credit score could be damaged.

Why use a credit card instead of a debit card?

A credit card gives you extra consumer protection should anything go wrong with a purchase, thanks to Section 75 of the Consumer Credit Act. It can also protect you against fraud, because if a credit card is stolen, your current account won’t be affected too.

Used responsibly, a credit card can boost your credit rating. You can also get reward credit cards, which give you cashback or perks for spending money.

Is a prepaid credit card really a debit card?

Prepaid cards allow you to load money onto the card and spend it wherever you would normally use a debit card. They are not the same as debit cards, as they are not linked to your bank account. Prepaid cards can be useful for travelling, budgeting or for those unable to get a standard bank account.

Summary: Credit cards vs debit cards

To sum up, credit cards and debit cards are useful products that have different pros and cons. It may be wise to have both in your wallet if you can.