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When you’re shopping, and you’ve got everything you were looking for and are at the till, you might just pick a card to pay without much thought. But all cards are not the same.
Here we explain how credit and debit cards work, when you should use each of them, the fees for both and which is better if you need to make a payment.
Debit cards vs. credit cards: Similarities and differences
When you use a debit card to pay for something, the money is taken straight from your current account. When you use a credit card, you are borrowing money from your credit card provider that you will have to repay by the date on your bill or be charged interest.
Confusingly, you may be charged if you are using your debit card and have overdraft. Money from your overdraft is usually charged at a set interest rate, in a similar way to the fees associated with credit cards.
Suppose your overdraft has a high interest rate and you’re using this money to pay for things. In that case, it may be cheaper to use your credit card if the interest rate is lower or you can repay it during the grace period before interest charges kick in (typically 56 days).
» MORE: Overdrafts: What they are and how to use them
When should you use a debit card instead of a credit card?
Using a debit card shouldn’t cost you anything, unless you’re using money in your overdraft.
Using a credit card doesn’t have to cost you anything, either, so long as you repay your balance each month before interest kicks in (or you’re enjoying an interest-free period on purchases). And if you have a rewards credit card, you can earn points or cash back as you spend with it. Just remember that for the above to be true, you have to clear your balance each month — if you don’t, the interest charges will cost you.
Which card is safer?
Credit cards can be a safer way to pay for some things. When you use your credit card you are covered under Section 75 of the Consumer Credit Act. This means anything you buy that’s worth more than £100 but less than £30,000 will be covered by law if something goes wrong. If, for example, you have bought a flight on your credit card and the airline goes bust, you should be able to claim the money back from it with this protection.
This protection does not exist when you buy something with a debit card. There is a similar scheme, known as ‘chargeback’, but it isn’t as robust as the Section 75 law.
» MORE: Section 75 credit card protection
Which card will cost you more?
The costs of a debit or credit card will depend upon the individual card and how you manage both accounts. The terms and conditions of your credit card will include all the costs, including the interest rate for purchases, the interest rate for taking cash out and the fees for late or missed payments.
Any fees linked to your debit card, such as overdraft charges, can be found in the terms and conditions of your current account. Some current accounts may charge a monthly fee, but this wouldn’t be affected by whether or not you use the debit card.
If you aren’t using an overdraft, there should be no costs associated with spending on your debit card. Equally, there may be no charges on a credit card either if you choose a fee-free card and pay the balance off every month.
If you are overdrawn, you’ll need to compare the interest rate on your overdraft with the rate charged on your credit card.
What’s the cheapest way to withdraw cash?
It’s a different story if you are making a cash withdrawal, rather than making a card payment. Withdrawing cash with your debit card shouldn’t cost you anything unless you’re taking money out from your overdraft or you are using a cash machine that charges for withdrawals
By contrast, withdrawing cash with your credit card — known as a cash advance — can be very expensive. Interest on cash advances is charged immediately and maybe at a higher rate than for purchases. In some cases, you may need to pay a cash withdrawal fee, too.
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