September 6, 2021

Pros & Cons: Credit Cards vs. Debit Card

Everything you need to know about the great battle of credit cards vs. debit cards. What are the pros and cons of each and which one you should use to achieve your financial goals.

16 min read

Qoins Staff


They may look identical, but they function in very different ways. Have you ever wondered what are the pros and cons? You’ve come to the right place. Here’s the breakdown of this decade’s battle of credit cards vs debit cards.  

Both might look similar and generally have 16 (in some cases 15) numbers, expiration dates, EMV chips & magnetic strips. These two cards became revolutionary when they hit the market as they are easy to use and extremely convenient for purchases made both online and in stores.

There’s a key difference between them. But before we dive into the differences between credit cards & debit cards, let’s learn a little about them.


What Is A Credit Card?

These cards are issued by a financial institution, in most cases a bank, which allows the cardholder to borrow funds from that particular institution, for a certain period of time. Cardholders who borrow the funds have an agreement to pay back in a given period of time, and with or without interest, as per the institution’s terms. The cardholder can also choose to convert the sum into installments. Generally, your purchases must be paid in full at the end of a monthly billing cycle, and failure to do so allows the issuing company to charge interest on the remaining balance. This type of debt is unsecured, which usually garners a much higher interest rate than a typical loan. 


What Is A Debit Card?

These types of cards allow the cardholder to use them for purchases, the money is deducted directly from their checking account. This means, the cardholder does not loan money from any financial institution but uses their own money. If you don’t have the funds in this case, you can’t make certain purchases. You can view a debit card as a digitized version of cash. 


Credit Cards vs Debit Cards

So, coming to the main question: what’s the difference between a credit card and a debit card?

Well, debit cards allow you to make purchases and spend money by drawing funds directly from your bank account. However, credit cards allow you to temporarily borrow funds from the financial institution up to a certain limit. 

Here are some key differences between a credit card & a debit card:

  • Credit cards help you get a line of credit from a financial institution, typically by a bank. While debit cards don't give you any credit line but allows you to use your funds that you deposited in your bank account.
  • Compared with debit cards, which are linked to bank accounts, credit cards have better consumer protections against frauds.
  • Today, a lot of credit cards are available in the market that don’t charge any annual fees, while newer debit cards offer credit cards like protection.
  • The average transaction value of credit cards is 3 times higher than those of debit cards. Signaling to us that consumers spend more when the purchase isn’t tied to funds they currently have in the bank. 


Pros of Credit Cards

Build credit history

Credit cards are excellent for building credit history and they can help you build excellent credit scores. They can help create positive credit history that includes timely payments, low credit utilization ratios, and even negative factors such as missed installments, late repayments, etc. However, when you’re just starting out in adult life, a good credit history can help steer you into financial freedom, later on. In sum, credit cards are a type of debt helping your credit score with your “credit mix” and if you pay on time each month with your payment history and utilization rate, all factors that weigh heavily on a great credit score. 


Warranty and purchase protections

Some financial institutions may provide additional warranties and insurance on items you purchase with the cards. These warranties and insurance are in addition to the ones offered by a retailer or a brand. In addition to this credit cards have been attracting millions of customers through benefits like cash back rewards, airline miles, and other free perks and benefits. 


Fraud protection

When it comes to fraud protection, many credit cards offer much better protection than debit cards. If the consumer reports fraud within 24 hours or as specified by the institution, the consumer can claim a certain amount.



Pros of Debit Cards

Avoid debt

A debit card allows you to use your own money by deducting the money directly from your bank account. Hence, avoiding borrowing any funds from the bank. This leads you away from the risk of going into debt, in fact, it eliminates the possibility of taking on high-interest debt. This is the very reason that financial experts recommend individuals with spending problems shift to only using a debit card, to avoid overspending and impulse buys. 


Fraud protections

Certain debit cards offer fraud protections on any transactions made, given that the cardholder reports a fraud within a specified time frame given by the bank.


No annual fee

Most debit cards today comes with no annual fee. Hence, these cards are suitable for people who don't wish to pay annual maintenance fees.

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Cons of Credit Cards

Spending can lead to debt

After you start using a credit card for long periods, you may get into the bad habit of purchasing everything in installments. But you should always remember you’re not spending your own money, but a financial institution’s. Spending money up to the limit to only hold that entire balance as revolving debt leaves you in a financial scenario that takes decades to get out of if you only make the minimum payments the issuer will require. This is a tool to keep debt holders in debt for as long as possible. 


Credit score impacts

If you fail to repay the money, your credit history can get hampered and you would dig your financial grave.


Interest and fees

As you're taking the money as a loan for the short term, you'll have to repay the principal amount along with some interest. The interest rate depends on your credit card's APR (Annual Percentage Rate). Some credit cards can and will charge APRs of over 24% which is compounded daily. 


Cons of Debit Cards

No rewards

Since you're not paying any interest, financial institutions do not offer rewards such as payback points in case of credit cards.


Won’t build credit

Debit cards do not allow you to borrow money and you're not repaying any money. This means you're not creating any monetary rapport with any financial institution. This means, you cannot build a credit history with debit cards.

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