In our digital world today, you no longer need to stress yourself to the bank or carry paper money around. With great banking tools such as credit and debit cards, you can comfortably carry out your transactions from anywhere and at any time.
To maximize the potentials of these banking innovations, you need to have a full grasp of what they are, how they work, how to use them, and the differences between them.
You might think that credit cards and debit cards are the same because they both have 16-digit pins that the system checks before enabling you to make a withdrawal. However, the difference between credit card and debit card can be summarized with;
- Ease of Use and Acquisition
- Terms and Limit
- and Effect on your credit score.
Before we dive into the difference between credit card and debit card, let see what they are and how they work.
What are Credit Cards, and How Do They Work?
A credit card is a one-of-a-kind payment card that allows you to seek a small loan from a financial institution on demand. A credit card is the smartest approach to secure a quick loan. This is why it is recognized as a financial tool with a preset credit limit.
To know more about a credit card, you can check out this guide on credit cards on how they work.
Preset indicates that you will be given a limit on how much you can use. The limit is determined by the banking institutions from which you obtained your card.
The total amount you can borrow will be determined by your credit score, wage, and your credit card history. When you’ve used it up, it’s more akin to saying you’ve spent all the money on your credit card.
Because a credit card functions more like a loan, any money borrowed on one is expected to be repaid. This means that if your credit card limit was $40000 and you used $35000, you’ll be repaying the amount you spent while your credit card balance is $5000.
To avoid incurring unnecessary charges, make sure you pay up your total amount spent by the due date. Although there is a grace period during which you should pay, it is strongly recommended not to delay. You can check out these 5 smart tips for using a credit card effectively.
Credit cards are convenient, and you may use them to develop an excellent credit history if you maintain good financial practices.
What are Debit Cards, and How Do They Work?
A debit card is a plastic card you can use to make transactions, pay bills, and withdraw cash. You can get a debit from a bank or any other financial institution, and this is possible only if you open an account with them.
Bank debit cards can be Visa or Mastercard. They do have expiration dates and must be safeguarded because anyone who obtains them has the potential to ruin your account balance.
Furthermore, a debit card does not impose a fee when you withdraw money from an ATM at your bank. You can use a debit card to make online purchases and withdraw cash from ATMs and POS machines.
A debit card withdraws money from the user’s account, removing the possibility of going into debt. Obsessive spenders might stick to their budget by using debit cards. It helps you to stay away from high-interest debt.
You can only use a debit card if you have money in your account, and they require a pin every time you use them.
Difference Between Credit Card and Debit Card
First and foremost, they are both plastic cards with the same purpose to provide you with access to funds.
A debit card allows you to access the cash you own and will not be charged for withdrawals. In contrast, a credit card will enable you to access a specific amount of money as a small loan.
Cash withdrawals from a credit card are similar to loans in that you use them to address specific difficulties but may have to repay them at a later point.
In essence, a credit card is a loan that you obtain to meet your requirements and must repay to get another loan. Now you know more about credit cards and debit cards, let’s explore their five significant differences.
1. Ease of Use and Acquisition
Credit cards are a convenient and quick way to make everyday transactions while also providing cashback or other perks. This type of service is not available on most debit cards because they hardly offer rewards for spending.
Both credit and debit cards are relatively easy to use, although how you can acquire them differs. Generally, obtaining a credit card can be more difficult than debit cards. Debit cards are simple to get and do not involve any time-consuming procedures.
If someone steals your debit card and withdraws funds from your account, recovering the funds may be more difficult and time-consuming.
In contrast, recovering funds from a credit card theft could be more effortless since you can request a chargeback. You can report the card as stolen or compromised, and your card issuer will block the card and try as much as possible to recover the funds.
2. Terms and Limits
Both may have similar terms of service, but the amount in your account determines the limits. When you use a credit card, you are spending from a loan; while you are utilizing your funds when you use a debit card.
The balance on a credit card is the amount you were given access to by the financial institution you choose, but the balance on a debit card is the money you own.
Credit card interest rates are famously high, and they are a major source of revenue for credit card companies. Consumers who pay their balance in full each month might avoid paying these interests.
Although certain banks may impose maintenance fees, debit cards do not carry interest. These maintenance fees vary depending on the bank and how frequently you use your debit card in a month.
Credit cards and debit cards are used similarly to access and use available funds. Virtual card numbers and contactless payments are available on both cards. And access to these cards is simply by entering a specific digit pin. You can use both to make payments on several online platforms.
Credit cards are preferred for regular use because of incentives such as cashback or miles. On significant purchases, your credit card may also provide warranty coverage or special savings at select retailers.
You can incur charges like international transaction fees, late fees, and fees for cash advances and balance transfers if you use a credit card. When using a debit card, you may only be charged fees for using out-of-network ATMs for cash, overdraft fees, and a PIN cost. You will not be paying any charge whenever you withdraw cash with your debit card from an ATM belonging to your bank.
Debit cards do not impose an annual fee. Due to the Fair Credit Billing Act, the most you can be charged if your credit card is stolen is $50. Similarly, if you lose your debit card, you will be charged to replace it.
5. Effects on Credit History
Unlike a debit card, a credit card can help you establish or destroy your credit history. Your credit score is a three-digit figure that ranges from 300 to 850 and is the outcome of a credit file review. Lenders use your credit score to assess your credit risk and capacity to repay debts.
Using your credit card properly to improve your credit history makes sense. Similarly, if your credit card has a rewards program, you may wish to use it to receive similar benefits (Check out these 7 perks you can benefit from using credit cards).
When you have good credit, you have a better chance of qualifying for credit cards and getting the best interest rates on a variety of credit products.
Which One is Right for You?
For larger online transactions, you might want to consider using a credit card, but only if you’re confident in your ability to pay your debt on time. Credit cards come in handy in a pinch both at home and abroad.
Furthermore, when traveling, most vehicle rental agencies, motels, and resorts will only accept a credit card on file rather than a debit card.
Both credit and debit cards are helpful for convenient online and physical transactions. Now that you understand how each of them works, you can maximize them for your daily financial operations.