Payset prespective
March 27, 2024

Debit and Credit Cards: What’s the Difference and What’s Best for You?

No matter how you spend your money, you’ve probably developed a basic familiarity with credit cards and debit cards. ‍But although both are meant for everyday spending, there are important differences between each type of card. Whereas credit cards allow you to spend money within a credit limit, debit cards allow you to spend an existing account balance. This difference should be a key consideration as you make decisions about your finances and plan your spending habits. We'll compare each type of card in greater detail throughout this article.

Key Takeaways

  • Credit cards come with interest rates and require regular bill payments
    • They are ideal for online, international, and large purchases
  • Debit cards draw from your existing account balance some text
    • These are ideal for local transactions and ATM access
  • Either option may be ideal based on your circumstances

Understanding Debit Cards

Debit cards are payment cards that allow you to spend money by deducting the value of each transaction from your account balance. 

Typically, debit cards draw money from your bank account. They may alternatively draw funds from an electronic wallet (such as a PayPal account) or any other monetary balance. Regardless, you can't spend more money than you have in your linked account.

Where Can I Use a Debit Card?

Debit cards are widely accepted for in-person retail transactions — especially if you only use your debit card when you are close to home and haven’t left your country. 

Debit cards also allow you to make ATM withdrawals and deposits. Major banks maintain large ATM networks that you can use to access your account. However, you should be aware of extra fees at third-party ATMs that are not operated by your bank.

International acceptance of debit cards varies. If your debit card is backed by a major issuer like Mastercard or Visa, it is probably accepted around the world. However, if your debit card is from a small bank or credit union, it may not be recognized globally.

Finally, debit cards are rarely accepted for retail online purchases, though it may be possible to use your debit card on the internet in some circumstances.

Are Debit Cards Secure?

Debit cards are highly secure. The financial networks that underlie debit cards handle your personal and transaction data in line with all relevant security standards.

Most debit cards provide the ability to challenge fraud and the ability to reverse disputed payments. However, UK citizens should know that protections under section 75 of the Consumer Credit Act apply to credit cards — and not debit cards.

Understanding Credit Cards

Credit cards allow you to transact so long as your balance remains within a credit limit. Each transaction is added to a total that must be paid off at a later date.

This means that you can spend money before you have it. However, you’ll need to pay off your credit card bill regularly in order to avoid interest charges.

What Are Credit Limits?

Credit limits are the maximum amount of money that you can borrow, usually per credit card. 

The amount that you can spend once you use part of your credit limit is called your available credit. Purchases (and interest that you accrue on purchases) will reduce your available credit. If you pay all or part of your bill, your available credit will increase.

Your card provider will determine your exact limit based on factors including credit score, personal income, and payment history. In the UK, the average credit limit is roughly £5,000, but you can expect a limit that is higher or lower than that amount.

This limit is not permanent: as you use and consistently pay off your credit card, you’ll build your credit history and gain access to higher credit limits.

Where Can I Use a Credit Card?

Credit cards can be spent on in-person purchases just like debit cards. Credit cards are more widely accepted online and in physical stores because they are typically powered by two major networks — Visa and Mastercard — which are recognized worldwide. 

Credit cards have extremely wide acceptance online. The US National Federation of Independent Business suggests that 90% of online purchases involve credit cards.

Credit cards may also provide ATM access, though this option is generally more expensive than using a debit card at an ATM operated by your bank.

Are Credit Cards Secure?

Credit cards provide many of the same security guarantees that debit cards do, including fraud protection, chargebacks, and compliance with broader security standards. 

You’ll also gain additional purchase protection. In the UK, section 75 of the Consumer Credit Act covers credit card purchases between £100 and up to £30,000. This means that, if a company fails to fulfill your purchase, the credit card company has equal responsibility to the seller in terms of resolving the issue. You can read more about this on UK Finance.org.

Though section 75 protection applies to credit cards — not debit cards — you can still challenge payments on any card through standard chargeback requests. 

Benefits of Credit Cards

Credit cards often provide reward programs that provide you with redeemable points or cashback as a percentage of each transaction. 

Usually, you’ll earn 1% or less each transaction. Some participating retailers may offer greater rewards, and you may earn higher rewards at the beginning of your credit card subscription. 

Rewards can offset interest charges — or even save you money altogether if you manage to avoid interest entirely. However, it is still important to spend within your means.

The Difference Between Debit and Credit Cards

As we explained above, debit cards and credit cards have features that often contrast against each other. We’ll summarize those differences briefly below. 

Debit card features:

  • Spending draws from an account balance
  • Zero interest charges 
  • Best for local retail payments 
  • Limited acceptance online 
  • Free or low-cost ATM access via bank ATMs
  • Basic fraud protection and chargebacks

Credit card features:

  • Spending builds toward your credit limit
  • Interest charges apply
  • Best for international retail payments
  • ATM access may be more expensive
  • Widespread acceptance online
  • Section 75 purchase protection in the UK, plus basic fraud protection and chargebacks
  • Better points and reward programs 

Is it better to have a debit card or a credit card?

Credit cards and debit cards are not necessarily superior to one another. Rather, each option is appropriate for different financial situations. 

Credit cards are ideal when you need to make large payments and online payments, and when you don’t mind the possibility of overspending and paying interest. They’re also ideal for international purchases due to the widespread acceptance of Visa and Mastercard.

Meanwhile, debit cards are ideal when you plan to spend money locally and access bank ATMs. They’re best when you can afford all of your purchases with an existing bank balance. This also means that you’ll never face interest charges or spend outside of your means.

Online Use and Safety

Although credit cards and debit cards both provide built-in security and protection, it’s important to take precautions and avoid problems before they begin. 

Here’s how you can stay safe when using your cards online:

  • Spend at trusted websites: High-profile e-commerce websites like Amazon and eBay are extremely reputable; meanwhile, small websites may not provide you with the same level of trust and safety and should be examined carefully
  • Avoid email offers: Though many email offers are legitimate, some emails contain phishing scams with fake information; instead of using email, visit trusted websites by typing their address into your URL bar to verify that the offer really exists   
  • Read the fine print: Even the most reputable websites may attempt to impose additional charges or register you for a costly premium service; be sure that you have not accidentally missed any of these terms before you complete a purchase
  • Don’t store your credit card data online: Some websites allow you to save your credit card information for easy re-ordering; if your account is compromised, this stored information may allow the hacker to make purchases on your account
  • Use a private device: Keep your credit card information tied to your own device; if you use a shared computer, don’t save your credit card information in your web browser
  • Check your card statements frequently: Inspect your card statements or bank statements for unexpected charges and report them immediately; it is usually easier to challenge unexpected transaction the sooner that you file a report
  • Report lost cards: If you lose your card, contact your card provider to cancel it and order a replacement; this will prevent anyone else from using your old card

Financial Implications and Fees

Credit Card Interest Rates

Credit cards have interest rates. Whenever you make a purchase with your credit card, the transaction amount is added to your bill. If you leave your bill unpaid or partially unpaid by the next due date, you’ll need to pay a certain percentage more on the next bill. 

This applies to all actions across your card. If you even partially pay off your balance, the amount owing will be lower, and if you make more purchases, the amount owing will be higher. 

Interest rates are advertised as an annual percentage rate (APR). However, bills arrive monthly and interest compounds daily. You’ll need to look at your bill for the exact amount owed.

The average UK credit card interest rate is 35%, but your exact interest rate will most likely be determined by your credit score and credit history.

Credit Card Fees

Credit cards may or may not have service fees.  

Premium credit cards with special features typically have the highest fees. You might also face foreign fees or other charges on some cards. Fortunately, it is usually possible to obtain a feeless credit card, especially if you are a member of a large bank with a wide range of options. 

Note that merchants usually pay per-transaction fees. This means that, apart from your built in card fees, you won’t pay more just because you make a large number of purchases.

Debit Card Fees

Debit cards generally do not have annual fees. However, debit cards are linked to a bank account, which may charge an annual fee for its broader services and features. 

Once again, you probably won’t pay per-transaction fees on your debit card because these fees are generally paid by merchants. However, your bank might charge you for each transaction if you use your debit card more often than is permitted by your account.

Debit Card Overdraft

Your bank account and debit card might provide overdraft. This allows you to spend more than is in your account. Your account will either provide no-fee overdraft or charge you a fee for overdraft. Regardless, you’ll need to pay back the amount quickly.

Overdraft is not a feature of all cards, and banks may apply it at their own discretion. Without overdraft, your debit card transaction may simply be declined if your balance is empty.

Building Credit with Credit Cards

One of the main benefits of using a credit card is the ability to build your credit score. Your credit score is calculated based on several factors including your payment history, how long you’ve had your card, and how much money you owe, among other factors.

With a better credit score, you’ll typically gain higher credit limits on your credit card, and you might be granted lower interest rates. Your credit score may also be applied beyond credit card transactions, such as when you attempt to buy a home or arrange a loan.

In the UK, there is no universal rating system for credit scores, but credit card holders can refer to Experian, Equifax and TransUnion for their credit score.

If you have no credit history or previous credit accounts, you might find it difficult to obtain a credit card for the first time. In this case, you might choose alternative credit cards, such as joint credit cards or secured credit cards, to overcome your lack of history.

Strategies for Building Credit

There are several strategies that you can use to build a strong credit score.

  • Pay bills on time: Paying your full credit card bill on time is one of the most important factors in your credit score; this should be your first priority whenever possible
  • Pay only partially if necessary: If you can’t pay your bill in full, you should pay as much as you can afford to in order to reduce the amount owed
  • Keep credit utilization low: You should stay well under your maximum credit limit in order to get an optimal credit score; some sources suggest that keeping a balance within 10%-30% of your credit limit is ideal
  • Leave credit accounts open: Lenders prefer to see highly established lines of credit, so you should leave credit cards and other lines of credit open for as long as possible (even if you no longer use that line of credit)
  • Use a mix of credit types: In addition to your credit card, you can build your credit score by obtaining and paying off mortgages, loans, and more 
  • Review your credit reports: Regularly inspect your credit card statements and credit reports for missed payments, unexpected payments, and possible fraud; address any issues as soon as possible 
  • Avoid hard inquiries: Every time you open a new account, companies will carry out a hard inquiry, which can negatively impact your scores; as such, you should not apply for additional credit cards or new lines of credit too frequently
  • Use specialized credit card options: If you are denied a regular credit card, you can apply for specialized cards such as secured credit cards and student credit cards, or you can become an authorized user on someone else’s card

Making the Right Choice

You should choose between a debit card and credit card based on your financial needs. 

Credit cards are ideal if you want to make large purchases, spend money online, and build up a credit history. Credit cards are especially useful if you plan to travel to foreign countries, as the two largest brands, Mastercard and Visa, are widely accepted by sellers. 

Credit cards come with responsibility: you should attempt to use your credit card only to the extent that you can pay your bill, as you’ll need to pay interest on any unpaid balance.

Debit cards are preferable if you have significant savings. Because debit cards are tied to an existing account, you’ll never pay interest and only need to concern yourself with overdraft. 

Debit cards are ideal for everyday spending and ATM access, especially if you stay in your local area. Some major debit cards can now be used in most countries and locations, but lesser cards are not always accepted internationally like credit cards are.

Conclusion

When it comes time to decide between a credit card and a debit card, you need to consider several factors. First and foremost, you should consider whether you can afford to pay regular bills and interest, or whether you would prefer to draw from your savings.

You should also consider where you want to spend your money, as credit cards and debit cards may be accepted to different degrees depending on your situation.

If you’re not sure which option is right for you, you can talk to financial advisors or bank employees for advice. You can always learn more without committing to any service.

How Payset Can Help

At Payset, we offer a virtual IBAN account that you can use to make payments internationally. 

We support several major currencies including the British pound (GBP), the euro (EUR), and the US dollar (USD). Our services allow you to send and receive money in over 180 countries, exchange 38 currency pairs instantly, and hold 34 currencies in your account.

We support transactions on leading networks, including SWIFT, SEPA, the UK’s Faster Payments Service, ACH, and CHAPS — plus free transfers between Payset users.

We plan to offer a prepaid debit card in the future. Sign up now to use our current payment options, or contact us for more information.

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Frequently asked questions

What is a multi-currency account/virtual IBAN?

A Payset multi-currency account allows you to receive money in 34 different currencies and send money in up to 38 currencies, all within the same account.

You can deposit and withdraw funds, convert currencies at competitive exchange rates, and hold your chosen currencies to capitalize on market movements.

A Payset multi-currency account allows startups and business owners to receive payments from clients virtually anywhere in the world and pay suppliers, staff, and contractors quickly and affordably in their chosen currency.

  • Funds can be deposited and withdrawn from the account for a small fee.
  • Account holders can send and receive money with other Payset users for free.
  • Depending on your region, you can use various payment networks from your Payset account, including SWIFT, SEPA, ACH, Fedwire, Faster Payments, BACS, and CHAPS. 
  • Once you register an account, you will be provided with a Virtual IBAN (International Bank Account Number), which makes all of these transfers easy.
  • We provide you with local payments and collections. For example, transactions in USD, EUR, CAD, and GBP are processed through the local payment networks, which is far cheaper and takes minutes as opposed to days

Are there limits on the amount of money I can send and receive?

No, there are no transaction limits on Payset multi-currency accounts.

However, higher-volume transactions may require additional anti-fraud verification. If you plan to make a large transaction, contact us in advance to avoid verification delays.

How is Payset regulated?

Payset allows you to receive payments in 34 currencies. You can send payments from your account in 38 currencies. For more details, check our payment guide.

How do I send money from my account?

Once you have opened your verified IBAN account and added money to a balance, transferring funds is simple.

Simply log in into your account and add a beneficiary, then simply “make a transfer” in your preferred currency to that beneficiary.

Information contained in this publication is provided for general education and information purposes only and should not be construed as legal, tax, investment or other professional advice or recommendation, or an offer of, or solicitation for, any transactions or any other actions (or refraining therefrom); This material has been prepared without taking into account any particular recipient’s financial objectives or situation. We make no warranty, guarantee or representation, whether express or implied, as to the completeness or accuracy of the information contained herein or fitness thereof for a particular purpose; Use of images and symbols is made for illustrative purposes only and does not constitute a recommendation or advice to take or refraining from any action; Use of brand logos does not necessarily imply a contractual relationship between us and the entities owning the logos, nor does it represent an endorsement of any such entity by Pay Set Limited, or vice versa; Market information is made available to you only as a service, and we do not endorse or approve it; Any reference to past performance, predicted returns, or likelihood performance scenarios may not reflect actual future performance and certainly do not guarantee future outcomes.

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