Differences between debit and credit card
When making an in-store or online purchase, it can be confusing to decide what card to use. Not only do they look similar, they almost perform the same function, providing a way to make payments. It definitely doesn’t help that Visa and Mastercard, two of the most popular payment networks, issue credit cards and debit cards.
Their logos, plastered on the front of both, make it quite difficult to distinguish between the two among other physical similarities like a 16-digit card number on the front and a magnetic stripe on the back, and any more. However, despite similar appearances, credit cards and debit cards differ in many ways.
Debit cards account for real-time transactions: The amount available in the user’s checking account or saving account, to which the card is linked, is the amount available for the user to spend. Accordingly, for every payment completed via debit card, the amount of money spent is the same amount deducted from the user’s bank account.
Credit cards, on the other hand, make use of a credit line: The credit card company that administered the user their credit card is the same financial institution users temporarily borrow funds from. So, when making a purchase via credit card, the credit card company pays the cost of the purchase for the user to later pay back with interest.
To put it simply, debit cards have a direct line to the cardholder’s checking account or any current account while credit cards act as a short-term loan – the key difference from which further distinctions arise.
Credit Cards
The proper use of a credit card can build the user’s credibility. The more reliable a cardholder is at paying back their debts and fees, the more credible they’re deemed. Accordingly, along with the interest to be paid, credit cards have more fees, like:
- Annual fee: the fee charged every year for being able to use the card.
- Balance transfer fee: the fee charged for transferring an amount of money from one card to another.
- Cash advance fee: the fee charged for withdrawing cash with a credit card.
- Foreign transaction fee: the fee charged for making payments outside the cardholder’s resident country.
- Late payment fee: the fee charged for making late payments toward credit card fees.
As such, users have to qualify for a credit card; if a credit card is misused, the cardholder can acquire deep debts that they are unable to pay back. Since the amount spent isn’t immediately deducted from the user’s account – as with debit cards – credit users can pay for their purchases (on credit) later; they can spend more than they have in their bank account without directly deducting from it. Users have the option to pay for these purchases all at once or through installments for more consistency – an option cheaper than taking out a personal loan if paid in full quickly or as per the credit card contract.
At the end of every month, the user is given a billing statement, on which a record of all transactions using the credit card is recorded. This way all purchases can be kept track of and verified. This can be used to detect credit card fraud, which, when caught, can be reported to the credit bureau. This will cancel the credit card and safeguard the user’s assets from any further damage; along with this protection, credit card users can earn points and rewards with usage. These points can be collected to exchange for gifts offered by the credit card company or cashback. In a few countries, based on the usage of credit cards, the user also earns credit scores i.e line of credit, and earned credit scores are being used by banks (lenders) to determine the interest rate for a private loan, student loan, home equity loan and other borrowed amounts. Banks offer credit cards to only those persons having reasonably high credit scores.
Debit Cards
While the absence of the many charges found in using credit cards may make the debit card more appealing, this card type has its own ups and downs.
Debits are easily acquired, sometimes given for free, at the bank when opening a checking account. There are no requirements for being able to hold a debit card as there is no option of building credibility with a debit card. This direct link between the account and the cardholder’s account limits the amount the user can spend. No more than what’s available in the account can be spent. Unless the user opts for overdraft protection.
Overdraft protection allows the user to spend more than what’s available in their bank account – if the user spends more money than what they have, they become charged with overdraft fees. If the cardholder decides not to opt for this choice, they will be unable to purchase goods or services that cost more than their bank account balance. If tried, the card declines, blocking the transaction from taking place. This prevents the cardholder from falling into debt or overspending.
Although debit cards seem like a cheaper option compared to credit cards, they aren’t exempt from charges. When debit card fraud is detected, the cardholder is required to pay a fee for the fraudulent charges. Withdrawing cash by a debit card at an ATM not associated with the bank that issued the user their credit card also charges a small price.
It is upto the user to decide which card most suits their needs and situation.
Using a credit card would give the user time to pay back their purchases – a good option for people unable to afford it at the given time – and the opportunity to earn more reward points and cashback. But all the fees included in the process may not be worth the purchase. Meanwhile, a debit card would eliminate the extra cost of interest a credit card user would have to pay but requires the amount paid to immediately be taken from the user’s bank account. If the purchase is particularly large, the cardholder runs a risk of emptying their account.
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