What is the Difference Between a Credit Card and Debit Card?

If you aren’t sure what the difference is between credit and debit cards in the UK, then you aren’t alone!

In this guide:

• Credit and debit cards: The differences
• The pros and cons of debit and credit cards
• How do credit cards work?
• Debit cards explained
• Which card should you use?

In order to be financially capable, to make the most of your money and to stay protected while spending, it’s important to be able to differentiate between the two types of cards and when to use each one.

Adults generally need to understand the pros and cons of both credit and debit cards, and knowing when to use which type of card is a must, but many people unfortunately don’t. If you are one of these people, reading our guide should help change that.

Our guide introduces the differences between debit and credit cards, explains which one might be most suitable for you in different situations, and how you can use them both safely.

The difference between a debit and credit card

Credit and debit cards are both used to pay for things, but the former uses borrowed money that you pay back, and the latter uses your own money.

The main difference is that money is withdrawn directly from your current account when you make a purchase with a debit card, while credit cards create a debt when they are used for purchases, which you must pay back within a certain amount of time and often with additional interest added if you don’t meet that timescale.

Despite looking near-enough identical, the two cards work very differently, which means that they both offer varying benefits under certain circumstances.

They can both be useful for different reasons, but be sure to keep in mind that the fact that they can both be used to buy things in-store and online doesn’t necessarily mean that they should be used interchangeably.

Credit cards vs debit cards: pros and cons

There are advantages and disadvantages to both credit and debit cards, as outlined in the following lists.

The benefits of using a DEBIT CARD include:

• There are no interest charges

• They can help you budget (due to spending limits)

• Your credit rating isn’t affected by spending

• Cash back is available at the point of sale and at ATM machines

• They are useful for daily use

• It’s safer than cash as you can cancel your card if it is lost

The potential cons of using a DEBIT CARD include:

• You can’t use them to build a credit history

• It’s possible to spend more than your balance, which could lead to fees

• The cost of using an overdraft can be as high as 40%

• You get less protection than you do with a credit card

The benefits of using a CREDIT CARD, on the other hand, include the following:

• You can build a credit history using a credit card

• Purchases can be made even if you don’t have the funds at the time

• You have payment protection when spending on a credit card as you are covered for between £100 and £30,000 as per section 75 of the Consumer Credit Act 1974.

There are some potential disadvantages to be cautious of when using a CREDIT CARD, such as:

• You could be charged interest if you don’t pay your balance in-full

• It’s easier to go over your budget as you aren’t using your own money

• Late payments will result in fees and interest

UK credit cards explained: how do they work?

When you buy something using a credit card, you are technically borrowing money from the credit card provider to pay for it and you will need to pay them back at some point. When this is depends on which type of credit card you have. 

Credit card holders are sent monthly statements (online or via post) with details of all transactions, which includes the time period within which they must pay off the debt. If the balance isn’t cleared within this timescale, interest will begin accumulating, increasing the overall amount owed.

Using a credit card ‘little and often’ is a great way to improve your credit score, as it allows you to build up a credit history and shows credit reporting companies that you are able to manage credit responsibly.

Check your credit score and get a detailed report today with Check My File to find out whether you need to start using a credit card to improve your credit rating.

Read more: How to Build a Credit History with a Credit Card

Credit card protection

Credit cards provide greater protection than debit cards when making purchases over £100, as Section 75 of the Consumer Credit Act means that the credit card provider is jointly liable with the retailer if anything is wrong with the goods or services. This means that getting your money back is far easier.

For example, if a company collapses before services have been delivered or you receive faulty goods, you should be able to get your money back through your credit card issuer.

Read more: A Guide to Credit Card Protection

Can you withdraw cash from a credit card?

You can withdraw cash from an ATM machine with a credit card, but it is often advised against as interest is generally charged on the cash you take out.

It’s also worth noting that it might be assumed that you’re struggling financially if you have to get cash from a credit card, which could damage your credit score, meaning that you should use your debit card to withdraw cash when possible.

What is a credit limit on a credit card?

A credit limit will be set when you open a credit card account, which is essentially the maximum amount of money that you are able to borrow on that card.

Your credit limit is usually determined by your credit rating and it can change depending on how you manage your card, so you could eventually get a higher credit limit if you consistently make payments on time.

Using a credit card safely in the UK

It’s important to be cautious of overusing your credit card – only ever spend what you know you can afford to repay, and avoid the temptation of going on a spending spree simply because you don’t have to pay with your own money straight away.

You will have to pay off the balance eventually, with interest in some cases, so be careful not to spend more than you can afford.

What should I use my credit card for?

You can use your credit card for just about any purchase, but there are some circumstances in particular where using a credit card can be beneficial, including:

• Making purchases over £100 (due to the credit card protection)

• When you want to build a credit history

• Paying for flights and holidays

What are debit cards?

Debit cards can be used to buy goods and services around the world, either by using a PIN or via contactless for purchases under £30.

They are linked directly to your current account, which means that your bank account will place a hold on the amount you spend when you use it to purchase goods or services. This amount will not leave the account immediately but it’s usually done within a few days (at most), so it’s unlikely that you will spend more than what is in your current account unless you have an overdraft.

With a debit card, you are spending your own money straight away, rather than borrowing it from a lender and being required to pay it back at a later date as you do with a credit card.

Debit cards are often used to withdraw cash from ATMs as these transactions will not cost you anything in fees or interest (unless the cash machine itself charges a fee).

Which type of card is best for you?

Many people choose to have both a credit and debit card, so it’s possible that you may also want to do this to maximise your financial flexibility. You can also have one without the other if you want to, of course.

Traditionally, people will get a debit card when they set up their bank account and will take out a credit card later on, once they feel that they are ready to handle credit responsibly or when they need to start thinking about improving their creditworthiness by building a credit history.

When you should use a credit card rather than a debit card (and vice versa) depends on both the situation and your preferences.

People with overspending habits and those who are concerned that they may end up buying more than they can afford to pay back may want to opt for a debit card as their main payment method, while people looking for more financial flexibility (in that they can ‘buy now and pay later’) may want to consider using a credit card more often.

There are, as mentioned, certain situations where it may be beneficial to use one ahead of the other. For example, credit cards can be useful when spending over £100 as they offer greater protection, while it makes more sense to use debit cards to pay for general spending, such as food shopping or eating at restaurants.

Here at Compare UK Quotes, we recommend having both a credit and debit card at your disposal in order to optimise your financial potential, but you should always evaluate the situation before determining which card to use for each purchase.

For more information about credit cards, credit scores and personal finance, be sure to browse our site and take a look at our related guides:

• Types of Credit Cards in the UK
• A Guide to Credit Card Protection
• Using a Credit Card to Improve Your Credit Score
• Balance Transfer Credit Cards Explained