Introduction: The Difference between Debit and Credit Cards
Having a piece of plastic in your back pocket is almost a necessity in today’s world. Without a credit and debit card, chances are that you won’t be able to rent a car, book a flight, or get money at an ATM once your bank has closed for the weekend.
Owning a debit and credit card isn’t only a convenience, but rather an essential part of financial literacy.
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Despite the wide use of both a credit card and debit card, many people simply don’t know the difference between a credit and debit card. Though both debit or credit can be used in similar fashion, there are important and fundamental differences between a credit or debit card that need to be taken into account.
In this brief article, AdvisoryHQ will explain the main difference between a debit and credit card. The first section will have debit and credit explained in a simple and straightforward fashion. Next, we will list the main difference between a credit and debit card.
We then turn our attention to who should consider using a debit card and credit card depending on their personal financial situation. We also offer advice on what factors to consider when choosing between a credit and debit card.
Finally we will explain whether a debit or credit card will affect your credit score and offer a list of features to look for when choosing between debit or credit.
Debit and Credit Explained in Simple Fashion
Both a debit and credit card look alike and can be used to purchase items from vendors, both online and in person as a replacement for cash.
Since many people don’t like carrying around large amounts of cash, using debit or credit is quickly becoming the main form of payment for a majority of Americans. Because both a credit card and debit card can be used so similarly, it is easy to understand why many people don’t understand the difference between debit and credit card.
While both a credit and debit card will carry the names of the major financial companies like Visa, Master Card, American Express, Discover, or others, the principal difference between a credit or debit card is where the money is drawn from.
According to the Balance, “the fundamental difference between a debit card and a credit card account is where the cards pull the money. A debit card takes it from your banking account and a credit card charges it to your line of credit.”
The main difference between a credit or debit card, then, is that when you use a credit card, you are basically taking out a miniature loan that needs to be paid back with separate funds. With a debit card, you are accessing your funds from your account.
The Main Difference between a Credit and Debit Card
When you don’t understand the main difference between a debit and credit card, it is easy to get yourself into financial problems. Since debit cards draw money directly from your checking account, you are basically writing a check every time you use your debit card.
Image Source: Creditcards.com
Each time you use your debit card, the company is putting a temporary hold on the amount for the purchase you just made until the bank transfers that money to the merchant’s account.
With both a credit or debit card, however, it is possible to get into debt. If you don’t keep track of your expenses and if you tend to keep a low balance in your checking account, you run the risk of overdrawing on your account.
This basically means that you are spending more money than what you have. Your bank will usually charge you a hefty fee for overdrawing your account through excessive use of your debit card.
The main difference between a debit and credit card is that when you use your credit card, you aren’t using your money, but rather borrowing small sums of money from your credit card provider.
Most credit cards have a limit of anywhere between $1,000 and $10,000. If you don’t pay off your balance in full each month, the bank will then charge you relatively high interest rates on your balance.
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With both debit or credit, you can make purchases without any sort of fees. The grace period on the loans with credit cards is usually around 30 days, meaning that if you pay off your balance in full each month, you are effectively getting an interest-free loan.
With your debit card, as long as you don’t overdraw on your account, you should be able to use your card for everyday transactions without any sort of cost.
Furthermore, both a credit or debit card can come with a number of hidden fees that are important to know. These fees on a credit or debit card can include everything from ATM fees to yearly fees. We will explore in more detail these fees associated with debit or credit below.
Who Should Consider Using Debit or Credit?
So how do you know if you should choose debit or credit. Once you understand the difference between a debit and credit card, you need to begin by examining your personal financial situation and your spending habits.
Using a credit card offers much more leeway than using a debit card, especially if you have a high credit limit on your card. For example, if you have only $500 in your checking account, but have a $5,000 credit limit on your credit card, you will have much more access to funds when using your credit card.
That extra access that comes with a credit card can come in handy in times when you need quick access to cash. However, many people find that higher credit limits can quickly lead into serious debt problems if they don’t consciously limit their spending.
When it comes to deciding between debit or credit, one of the main factors to consider is how financially responsible you are. While you can get into financial problems with either a credit or debit card, trying to dig yourself out of a several thousand-dollar credit card debt can be hard, especially because of the high interest rates on many credit cards.
For people who don’t have the best spending habits, when choosing between debit or credit, it’s probably best to go with a debit card and make the effort to track your spending to avoid overdrawing your account.
If, however, you are responsible with your money, when choosing between debit or credit, it might be in your best interest to go with a credit card. As long as you pay off your balance in full each month, you won’t have to worry about any sort of debt or interest payments.
Additionally, while both a credit card and debit card can come with rewards programs, you’re much more likely to get better rewards and points through regularly using a credit card.
Factors to Consider When Choosing between a Credit Card and Debit Card
Besides your own spending habits, there are other factors that need to be taken into account when deciding between a credit or debit card. Below we list three factors that you should consider when choosing a credit or debit card.
Fraud Protection: While both a debit card and credit card do offer fraud protection, credit cards are much better for protecting you when you purchase online. Most credit cards offer zero liability clauses meaning that you are not financially responsible for unauthorized charges.
Speed of Payment: If a vendor or merchant wants to get his or her money quickly, it’s probably better to go with a debit card. Debit cards handle transactions almost instantaneously, so they would be the best option if speed is necessary. However, for most purchases, debit or credit both get the funds where they need to be.
Extra Benefits: One of the main benefits of using credit cards is that they often offer extra perks and benefits. For example, if you rent a car with your credit card, you might qualify for free rental car insurance while your debit card most likely wouldn’t offer that sort of service.
Will a Credit or Debit Card Affect My Credit Score?
For people who suffer from a low credit score and who are continuously looking for ways to improve their credit, choosing between a credit or debit card is important.
If you want to build credit, it is important to know the difference between a debit and credit card. According to E-Credable, “if you only use your debit card to pay your bills (car payment, rent, mortgage, credit cards), you’re not building up a credit history or improving your credit score. The only positive thing you are doing is keeping yourself from going into debt.”
On the flip side, if you don’t use your credit card responsibly, your credit score will most likely take a hit. Using a debit card generally doesn’t affect your credit score either positively or negatively.
The only way a debit card could potentially affect your credit score is if you overdraft from your account, don’t pay the fees you owe, and the bank hires a collection agency to come and charge you.
What Features to Look for in a Debit Card and Credit Card
When you are looking for a credit or debit card, there are a few features that you need to be aware of. The main features to consider for both debit or credit are the fees associated with the card. With credit cards, make sure you find out what the interest rate is after the introductory offer expires.
With debit cards, find out if you have a limit to a certain amount of monthly transactions and if there are any fees for extra transactions.
For both a credit and debit card, it is important to check if there are any sort of ATM fees associated with your card. Big banks usually belong to ATM networks that have thousands of in network ATMs around the country.
However, if you use your credit or debit card outside of those network ATMs, you need to know how much you will potentially be charged.
Conclusion—Know the Difference between a Debit and Credit Card to Improve Your Financial Future
One of the most important aspects of basic financial literacy is learning to know the difference between a debit and credit card. For people who don’t understand how to differentiate between a debit and credit card, major financial difficulties could be on the horizon.
Using a credit card irresponsibly can lead to major problems with debt while negligent use of a debit card can lead to serious bank fees for overdrawing your account.
In this article, we have attempted to have debit and credit explained in a simple and easy-to-understand fashion. Learning the difference between debit and credit card can help you make an informed decision on whether debit or credit is right for you.
Having access to some form of electronic payment is almost a necessity in today’s world. While both a credit or debit card can offer you a form of electronic payment, learning the major differences between a debit and credit card can help your financial future.
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