Difference between Credit Card and Debit Card
Credit cards and debit cards are frequently mixed up. Both cards have the same size, contain your name and the card's expiration date, and feature a 16-digit card number.
Both facilitate ATM withdrawals and cashless transactions. Are they the same, though? They are not, though.
A debit card is entirely distinct from a credit card. A debit card enables worldwide withdrawals from a savings account, whereas a credit card allows the holder to borrow money from a bank.
In terms of their 16-digit card numbers, expiration dates, magnetic stripes, and EMV chips, credit, and debit cards are nearly identical, and both may make it quick and convenient to shop in-person or online.
You can make purchases by taking money from your bank account with a debit card. Credit cards let you borrow money from the card issuer for purchases or cash withdrawals up to a predetermined limit.
You carry at least one credit card and debit card in your wallet. They offer unmatched convenience and safety, but a few significant differences could significantly influence your budget.
Based on how much money you spend, here's how to choose which one to use, credit card or debit card.
Continue reading the article to learn how to use debit and credit cards effectively and their differences.
A card that lends money to cardholders is known as a credit card, and these institutions are typically banks. Following the institution's rules, cardholders agree to pay back the money borrowed plus interest. In the following categories, credit cards are offered:
- Standard Credit Cards: Standard credit cards often don't have an annual fee and offer customers a credit line they can use for purchases, bill transfers, and cash advances.
- Premium Credit Cards: With premium cards, you can get concierge services, airport lounge access, special event admission, and other privileges, but their annual rates are typically more excellent.
- Reward Cards: Depending on their use, rewards cards offer users cashback, travel points, or other benefits.
- Balance Transfer Cards: Balance transfer cards provide reduced introductory interest rates and fees for balance transfers from another credit card.
- Secured Credit Cards: This type of Credit card require a down payment in cash, which the issuer retains as collateral.
- Charge Cards: Charge cards don't have a set spending limit, but they often don't allow balances to roll over each month.
Advantages of a Credit Card
Compared to debit cards, credit cards have some benefits, but they also have some drawbacks. Here is a closer look at the advantages of issuing credit cards.
- Create a credit history: Your credit report contains information on credit card use. This includes both positive and bad aspects, such as timely payments and low rates of credit consumption, as well as late payments and delinquencies. Your credit scores are then determined using the data from your credit report.
- Warranties and purchase safeguards: In addition to those provided by the retailer or brand, some credit cards might offer supplementary purchase warranties or insurance. For instance, it may be worthwhile to check with the credit card company to see if it would cover the expense if an item purchased with a credit card turned out to be defective after the manufacturer's warranty expired.
- The Fair Credit Billing Act allows credit cardholders to dispute fraudulent purchases and goods harmed or lost after delivery.
Disadvantages of a Credit Card
Debt, potential effects on credit scores, and expense rank as credit cards' worst drawbacks.
- Spending too much can result in debt: When you use a credit card, the bank's money is what you pay. The borrowed funds must be repaid, plus interest. You must make monthly payments. Large outstanding balances on many credit cards may strain your budget.
- An impact of credit scores: You can raise your FICO ratings by making on-time payments on your debts and maintaining low credit card balances. However, if you repeatedly pay late, use all your available credit on one or more cards, close off older accounts, or make credit requests too frequently, you risk damaging your credit history.
- Interest and fees: A credit card is a short-term loan, so you'll have to pay interest on anything you spend. Your annual percentage rate (APR) is computed using the cost of borrowing and the applicable interest rate. If the card's APR is higher, carrying a debt from month to month will cost you more money.
A debit card is a payment card that uses a consumer's checking account as the primary source of funds rather than a bank loan. Debit cards offer many of the same consumer protections and convenience as credit cards when issued by well-known payment processors like Visa or Mastercard.
Debit cards come in two varieties, and neither requires the user to have a bank or savings account.
- Electronic Benefits Transfer Cards: To enable eligible users to use their benefits for purchases, state and federal organizations issue electronic benefits transfer (EBT) cards.
- Prepaid Debit Cards: Prepaid debit cards allow users up to the amount preloaded on the card to make electronic purchases without having access to a bank account.
Advantages of Debit Cards
Debit cards can have both advantages and disadvantages. Let's examine the benefits of debit cards:
- It helps to avoid debt: A debit card uses the user's funds, removing the possibility of incurring debt. Retailers are aware that card payment clients spend more than cash-paying customers. Using debit cards allows impulsive spenders to avoid the lure of credit and maintain their spending plan. This may help you avoid taking on high-interest debt.
- Fraud protection: Some debit cards are also starting to offer some of the same security features as credit cards, especially those issued by payment processors like Visa or Mastercard.
- There are no annual fees: Unlike many credit cards, debit cards do not levy yearly fees. Using your debit card to make a cash withdrawal from an ATM at your bank is likewise free of charge. Credit cards may charge a cash advance fee and a high-interest rate in exchange for this convenience. To keep your checking account open, you might pay additional fees.
Disadvantages of Debit Cards
Regarding cost and how they affect credit scores, debit cards have identical drawbacks to credit cards.
- There are no rewards: Unless you have a reward checking account, you won't receive any points, miles, or cash back on debit card purchases. If you only use your debit card to redeem rewards, you might miss out because they can save you money depending on how you use them.
- It won't assist you in creating credit: Having outstanding credit requires demonstrating to lenders your ability to make on-time loan repayments. Debit cards linked to bank accounts can't be used for that. Thus, you need more than one of these cards to establish or maintain a credit history.
- Fees: Although debit cards do not have annual fees, opening a checking account could incur additional expenditures. These costs include monthly maintenance fees, overdraft charges (if you overdraw your account), returned item charges, and foreign ATM charges (if you use your debit card at a machine owned by another bank or financial institution).