The Difference Between Credit and Debit Cards

Managing finances, making decisions on budgeting and achieving financial goals can be difficult. When it comes to thinking about how you manage your money it’s useful to think about when you want to use a debit or credit card and to understand the difference between them. While both enable you to make purchases, there are big differences in the way you manage spend on them.

What is a debit card?

Debit cards are linked to your bank account. So when you make a purchase, money is taken directly from your current account.

Debit cards are typically used for everyday transactions. Remember you can track your spend digitally via a banking app or online banking.

Debit card features

There are many different types of debit cards, but generally they have similar features:

• Spending Limit: They allow you to spend money in your current account (including any overdraft).
• Charges: There may be charges to withdraw money from some ATMs, there may also be overseas charges if using your card abroad. Some current accounts have monthly fees attached to the account so it's important that you understand what these are.
• Overdrafts: Can be a way to borrow money through your current account, these are useful for short term borrowing and can be helpful to cover unexpected expenses or shortfalls.

What is a credit card?

A credit card is a form of loan where you can borrow money from your bank or other financial provider so this means the money isn’t immediately taken out of your account.

Depending on the credit card you have, you can spend this money on purchases for goods and services or use it to transfer a balance from an existing credit card.

You must repay the money you borrow, along with any interest that may be charged.

Credit card features

There are many different types of credit cards, but most of them have similar key features:

• Borrowing: You can borrow money, up to a certain limit.
• Interest charges: You’ll typically need to pay interest on your unpaid balance.
• Scheduled repayments: You’ll need to make regular payments based on the schedule set out by your credit card provider. Bear in mind that scheduled payments can vary between 1% to 100% of the outstanding balance.
• Credit score: The amount that you spend on your credit card and the frequency that you pay it back will have an impact on your credit score.
• Section 75 of the Consumer Credit Act 1974 protects credit card purchases between £100 and £30,000, allowing consumers to claim a refund if goods are faulty or the supplier breaks the contract.

Making the most of your debit card

Debit cards are a great way to keep on top of your regular monthly budget. It's easy to track the amount you spend when using a debit card through internet banking or a mobile banking app.

Making the most of your credit card

Credit cards can help provide financial flexibility and protection. They can be helpful for unexpected expenses, such as a broken appliance or a vehicle breakdown. If you need to make a large purchase, a credit card can provide flexibility and allow you to pay for something over a period of time, rather than upfront.

Most credit cards also offer a certain level of insurance and purchase protection, which makes them useful when you’re paying for expenses or buying items online (more on that below).

However, when spending on a credit card, it’s important to take your credit limit, balance, and repayment plan into account. Having an outstanding balance means you’ll owe interest, which can add up to significant debt if you don’t have a plan to pay it off.

Understanding the costs

Both debit and credit cards come with different costs. These will vary, depending on your bank or card provider.

With debit cards:

• Your overdraft and personal current account fees are linked to the debit card, but you’re not charged for the card itself
• If you are using an overdraft, you may be charged debit interest
• If you’re using your card overseas, debit card transaction fees may apply

Credit cards typically have more associated fees compared to debit cards, including:

• Some credit cards have an annual fee
• Interest fees on your card’s outstanding balance
• Fees or penalties for late or missed repayments
• Fees for withdrawing cash
• Fees or penalties for exceeding your credit card limit

Using your debit card in the UK

• When you withdraw cash using your debit card, you’re simply taking money out of your account and you won’t pay any fees (unless the cash machine charges one).

Using your credit card in the UK

• If you withdraw cash using your credit card, you’ll typically have to pay a cash advance fee. You may also have to pay higher interest on the amount of cash you withdraw.
• Purchases that you make on your credit card are taken from your line of credit. This will impact the remaining amount you can spend on your credit card and the overall balance that you owe.

Purchases and cash withdrawals outside the UK

Depending on the type of debit or credit card that you have, you may face different costs and fees for using it outside of the UK, including:

• Foreign exchange rate: This is the rate at which your bank converts pounds into another type of currency
• Foreign transaction fees: You may be charged a fee for using your card outside of the UK

Credit cards typically offer better exchange rates and purchase protection compared to debit cards. It’s always a good idea to review your card agreement or talk to your card provider before travelling to make sure you know about any potential fees or charges.  It’s important to check, as some may not charge at all.

Chargebacks – What are They?

A chargeback allows you to request a refund from your card issuer if you don’t receive what you paid for. This process is also called a dispute.

When Can You Use a Chargeback?

You may be eligible for a chargeback if:

• The goods or services you paid for were not delivered.
• The items were faulty, counterfeit, or defective.
• You were charged the wrong amount or billed twice.
• A subscription payment was taken after you cancelled.

How to Make a Chargeback Claim

1. Contact the seller first – they may resolve the issue directly.
2. Reach out to your card provider – inform them you want to file a chargeback.
3. Provide supporting evidence – your card provider may ask for receipts, emails, or other proof.

Time Limits

• Chargeback claims are usually made within 120 days of purchase.
• However, some card providers may have different deadlines.

Other Options

If a chargeback isn’t successful, you may be able to escalate your claim through other dispute resolution services. Always check with your card provider for further steps.

Understanding Section 75

Thanks to Section 75, credit cards often offer built-in protection against fraud and unauthorised transactions.

If your credit card is stolen or someone gets hold of your information and uses it without your knowledge or permission, you can report it to your card provider and they’ll investigate. If the charges are found to be fraudulent, they’ll be removed from your card balance.

These protections make credit cards a safer option when shopping online or making purchases abroad.

If either your debit or credit card is lost or stolen, report it to your bank immediately.

Other things to consider

Budgeting

When you’re trying to stick to your regular, household budget, debit cards can be a better tool for managing your finances. With a debit card, you’ll have a clear overview of how much money you have available, which can keep you on track to avoid overspending. Bear in mind that, you’d have to check your balance to get this information.

If you’re making a large purchase, using a credit card can help you budget for it over a longer period of time. If you are not able to clear the full balance when your bill arrives you’ll need to make regular repayments and stick to your payment schedule to ensure you pay it off as soon as you are able to.

If you’re considering applying for a personal current account, which comes with a debit card, or thinking of applying for a credit card, and you have questions about which form of spending is best for your circumstances, get in touch to set up a chat with our team.

You can chat with us through our Mobile Banking App or you can give us a call – our lines are open 8am – 8pm Monday to Sunday. You can also pop into your closest branch to manage your finances.