The differences between credit cards and debit cards

While credit and debit cards may seem similar, they vary in both how they work, and where funds are drawn from. Knowing the key differences will help you make the right choice when you’re deciding between the two. Here’s how they compare.

Where do the funds come from?

Debit cards let you withdraw cash from an ATM and make purchases using your own money. You are restricted by how much money is in your account and your daily spending limit. If you need more than what’s in your account, you won’t be able to access additional funds.

With a credit card you can make purchases using a line of credit from your financial provider, such as a bank. You may be able to withdraw money from an ATM as a cash advance and access more funds than your agreed credit if needed, but you’ll be charged additional fees and interest rates.

Credit cards can be useful in case of an emergency should you not have enough money in your transaction account or emergency fund. 

Spending limits

Credit cards can be tempting and put you at risk of falling into debt if you’re not conscious about your spending. With a credit card, you borrow money from the bank based on your income, expenses, behaviours, and credit history.

With a debit card, you’re limited to the funds you have in your account and are less likely to accumulate debt. Your debit card will also have a daily cash withdrawal and transfer limit which can further protect you against fraudulent transactions.

Fees and charges

Credit cards can have high monthly or annual fees, which will differ depending on the type of credit card you choose. You may also be charged a late payment fee if you miss your repayment, and be charged interest on purchases if you don't repay the balance in full.

Both debit and credit cards can be used for your everyday expenses, but using your debit card often means you won't be incur fees and charges, as you're using your own money. Some debit cards also offer benefits like cashback or complimentary insurances, but these cards tend to have a monthly fee.

If you're planning to travel and use your card overseas, some credit and debit cards will incur additional fees, such as an international transaction fee. It’s a good idea to check what those fees are so you can stay on top of your finances while you’re away.

Credit score

If you’re saving for a big purchase like a house or a new car, your creditworthiness will play a big role in how much money your financial provider will lend you.

There are ways to improve your credit history and build a higher credit score to make borrowing a better experience and support you to borrow more money. Things like paying your bills, rent and mortgage on time can improve your credit score, regardless of the type of card you use.

While debit cards aren’t listed on your credit report and don’t impact your credit score (you are using your own money after all), your credit card can impact your score in both a positive and negative way. Making timely repayments on your credit card each month can build your trustworthiness with lenders but can also harm your credit score if you fail to pay the amount owed or miss a repayment. 

It's a good idea to access your credit report to understand how you’re tracking and give you an idea of how desirable your application could be to a lender should you wish to borrow more money. 

Eligibility and application

If you’re over the age of 14, debit card applications are easy and only take a few minutes to complete. The age requirement may vary depending on the bank. If you’re under 14 years of age, you’ll need to go into a branch with a parent to open up an account. Learn more about youth banking.

Before you apply for a debit card, you’ll need to have an everyday transaction account in your name. If you do, the bank will then need you to prove your identity, and then link your new debit card to your transaction account. 

To apply for a credit card, you need to meet certain eligibility criteria like age (you need to be over 18 years of age), proof of income and your creditworthiness, just to name a few. Make sure to check what you need and have everything ready when you apply, as repeatedly applying for credit cards and getting rejected can harm your credit score.

Rewards and benefits

Unlike debit cards, certain credit cards provide benefits like complimentary card insurances, that offer added security measures when you travel.  These cards can also be linked to reward programs through airlines or stores, and you earn points based on purchase types and amounts. You can then redeem those points to pay for things like groceries, household items, or even flights. 

Debit cards aren’t affiliated with reward programs or special offers, however some debit cards like the NAB Platinum Visa Debit card offer cashback on contactless purchases, complimentary travel insurance, and purchase protection insurance for a monthly fee.

Should I choose a credit or debit card?

Making the decision to choose between a debit and credit card comes down to what you need the card for, what benefits are important to you, and how well you can manage your money. Can you make regular repayments on time if you were to get a credit card? Do you prefer spending only what’s in your account? 

Regardless of which way you go, knowing how to budget and spending within your means is the best policy going forward.

If you want to look at your credit card options, we have a great credit card comparison tool that lets you select different cards andcompare the rates, features and benefits of each.