Credit vs debit
With a debit card you spend your own money from a bank account; with a credit card you borrow from the issuer and repay later. In bookkeeping, debits and credits are the two sides of every entry.
In short
- Debit spends money already in your account; credit borrows until the statement is paid.
- Credit can build credit history and gives float, but carried balances cost interest.
- In bookkeeping, debits increase assets and expenses; credits increase liabilities, equity and revenue.
Credit versus debit comes down to whose money you are spending. A debit card takes the money from your bank account at the time of purchase. A credit card borrows from the card issuer, and you repay it later, with interest on any balance you carry past the due date. The same two words also name the two sides of every bookkeeping entry, a separate meaning covered below.
Credit cards and debit cards
- Source of funds: debit uses money you already have; credit uses the issuer's money until you pay the statement.
- Cost: debit has no interest; credit charges interest on balances carried forward.
- Credit history: credit card use and repayment are reported to credit bureaus; debit usually is not.
- Disputes and fraud: with credit, disputed money is the issuer's while the claim is open; with debit, it has already left your account.
- Merchant fees: in Canada, Interac debit usually costs merchants less to accept than credit.
For a business, credit gives a few weeks of float and one statement to reconcile. Debit keeps spending tied to the cash on hand. Either way, the card line shows only a merchant and an amount, and the receipt is still needed for tax and categories.
Debits and credits in bookkeeping
In double-entry bookkeeping, every transaction has equal debits and credits. Debits increase assets and expenses. Credits increase liabilities, equity and revenue. A bank says it has credited your account when it adds money because, in the bank's own books, your deposit is money it owes you.
Worked example
One purchase, two cards
An Ontario business buys $100 of office supplies plus $13 of HST. Paid by business credit card, the entry debits Office supplies $100 and GST/HST input tax credits $13, and credits Credit card payable $113. Paid by debit card, the debits are the same and the $113 credit goes to the bank account instead.