Credit Card vs Debit Card: Protection, Credit and When to Use Each

A debit card spends money already in your bank account, while a credit card borrows money you repay later. Credit cards build a credit history, offer stronger fraud and purchase-dispute protection and can earn rewards, but cost interest if you carry a balance. Debit keeps spending within your balance and charges no interest. The best choice depends on whether you pay your card in full every month. The comparison and examples below cover Canadian rules first, then the US.

What is the difference between a credit card and a debit card?

The difference is whose money you are spending. The US Consumer Financial Protection Bureau (CFPB) puts it this way: debit and prepaid cards are ways to spend money you already have, while credit cards are ways to borrow money that you must repay by the due date. That one difference drives everything else in the table.

Does using a debit card build your credit score?

No. The CFPB says debit card and cash purchases do not create a credit repayment history, because you are not borrowing money you need to repay. In Canada, the Financial Consumer Agency of Canada (FCAC) explains that your credit report is built from borrowing and credit applications, such as credit cards and loans.

If you are starting from nothing, a credit card used lightly and paid in full is the usual first step. A secured card works if you cannot get approved for a regular one; see our guide to secured credit cards and our walkthrough on building credit with a credit card.

Which is safer if your card is lost or stolen?

A credit card is generally safer, because fraud uses the bank's money rather than yours while the problem is sorted out. Here is how the rules compare.

In Canada, FCAC says your maximum liability for unauthorized use of a bank-issued credit card is $50 unless you were grossly negligent, and Visa, Mastercard, American Express and Interac have zero liability or fraud protection policies. For debit, the Canadian Code of Practice for Consumer Debit Card Services says you are not liable for losses from circumstances beyond your control, such as someone using your card after you reported it lost. You can be held responsible if you did not protect your PIN, so never share it or write it on the card. FCAC also notes that co-badged debit cards, such as Visa Debit or Debit Mastercard, carry the network's zero liability protection.

In the US, the Federal Trade Commission explains that credit card liability is capped at $50, and is $0 if you report a lost card before anyone uses it. Debit liability depends on timing: $0 if you report before any unauthorized use, up to $50 within 2 business days of learning of the loss, up to $500 after that but within 60 days of your statement, and potentially unlimited after 60 days. Banks generally have 10 business days to investigate a debit error before they must give provisional credit, and up to 45 days, or 90 in some cases, to finish.

Even with Visa's policy, which says issuers must replace funds taken by unauthorized credit or debit transactions within five business days of notification, that money is provisional and can be delayed or reversed. With debit, the missing money comes out of the account you use to pay rent and bills.

Which is better for online shopping and travel?

Credit usually is. The Competition Bureau of Canada advises paying by credit card online because it provides additional protections and lets you dispute charges, while debit and prepaid cards do not offer the same protections. In the US, the Fair Credit Billing Act rules give credit cardholders a formal billing error process.

Travel adds holds. Scotiabank explains that pending transactions, including pre-authorization holds, can stay on an account for up to 7 days, and that at gas stations you may see a higher pending amount than you spent. On a debit card, a hold like that ties up money in your chequing account; on a credit card, it only reduces your available credit. Many travel credit cards also include insurance that debit cards do not.

When does paying with credit cost more than debit?

Credit costs more as soon as you carry a balance, because the interest usually outweighs any reward. Here is a worked example with stated assumptions. Assume you earn 1% back on a $1,000 purchase, which is $10. If you pay the statement in full, you keep the $10 and pay no interest; FCAC says federally regulated issuers must give at least a 21-day interest-free grace period when you pay the balance in full by the due date. If you instead carry the $1,000 for one month at a 20.99% annual rate, the interest is roughly $1,000 times 20.99% divided by 12, or about $17.49. You end up about $7.49 worse off than if you had used debit.

When you do pay in full, rewards add up. Assume $500 a month of groceries on the no-fee Tangerine Money-Back Credit Card with groceries as one of your 2% categories. That is $500 times 2%, or $10 a month, which is $120 a year. With debit, the same spending earns nothing. For more no-fee options, see our best no-fee credit cards in Canada guide.

Do debit and credit cards have different fees?

Yes, and they show up in different places. With debit, FCAC says you may have to pay a fee when you use your card, depending on your financial institution, and a terminal or ATM operator can add a convenience fee or surcharge only if it appears on the screen and gives you the option to cancel at no cost. Your bank may also set daily limits on cash withdrawals, in-store purchases and online transactions.

With credit, the main costs are the annual fee, interest if you carry a balance, cash advance interest from the day you take the cash, and foreign transaction fees. In our Canadian product data, the Tangerine Money-Back has no annual fee while the TD Cash Back Visa Infinite charges C$139 a year, and both add 2.5% to purchases made in a foreign currency. Compare those costs in the information box that issuers must provide before you apply.

When is a debit card the better choice?

Debit is better whenever using credit would lead to interest or overspending.

• You are paying down a balance. Adding new purchases to a card that already charges interest makes the debt harder to clear.
• You need cash. A credit card cash advance has no interest-free grace period, so interest runs from day one.
• You budget best with money you can see. Debit stops at your balance, subject to any overdraft arrangement.
• A terminal adds a fee you can avoid. FCAC notes that convenience fees must appear on screen with an option to cancel at no cost, so you can choose another payment method.

How can you use both cards well?

Most people do best using a credit card for planned spending and a debit card for cash, with a few rules that keep interest at zero.

1. Put regular spending on one credit card and set up automatic payment of the full statement balance.
2. Use debit for ATM cash rather than a credit card cash advance.
3. Keep your credit card balance under 30% of the limit, as FCAC recommends, to help your credit score.
4. Turn on transaction alerts for both cards so you spot fraud within minutes.
5. Protect your PIN, because debit protection in Canada depends on it.
6. If you start carrying a balance, switch to debit until the credit card is paid off.

If you want a card that pays back on everyday spending, compare options in our Canadian credit card listings.