Making purchases in shops or online using credit cards and debit cards may be simple and convenient. Debit cards let you spend money by drawing on funds you have deposited at a bank. Credit cards allow you to borrow money from the card issuer up to a certain limit. So before you apply for credit card read this article to find out the difference between credit cards and debit cards.
Credit Card
A credit card is a card that allows the cardholder to borrow money from a financial organization, usually a bank. Cardholders agree to repay the money, plus interest, according to the rules of the institution.
Categories of credit cards
- Standard credit card: This card provides its users with a line of credit that they may use to make purchases, balance transfers, and/or cash advances, and they usually don’t have an annual fee.
- Premium card: Concierge services, airport lounge access, special event admission, and other benefits are available with premium cards, but they normally come with higher yearly costs.
- Rewards card: Customers who use rewards cards receive cashback, travel points, or other incentives based on how they spend.
- Balance transfer card: On balance transfers from another credit card, balance transfer cards offer reduced introductory interest rates and fees.
- Secured credit card: Secured credit cards need an initial cash deposit, which is retained as security by the issuer.
- Charge card: Charge cards don’t have a defined spending limit, but they don’t usually let unpaid amounts rollover from month to month.
By using rewards cards, credit card users may earn cash, discounts, travel points, and other benefits. Rewards can be applied in a flat-rate or tier-based fashion. Some credit cards provide limitless miles per dollar spent or multiple levels of rewards for certain transactions.
Credit cards have many advantages
Credit cards have several advantages over debit cards, but they also have some disadvantages. Below is a closer look at the advantages and disadvantages of using credit cards for purchases.
It helps build the credit history
Your credit report will show how you used a credit card. With a history of spending and regular payments, responsible spenders can improve their ratings. You may also raise your credit score by keeping your credit card balances low in comparison to your credit card limitations. This information is used by the American credit bureau to determine your credit ratings.
Purchase protection and Warranty
Additional warranties or insurance on purchased products may be provided by some credit cards. Whether an item becomes damaged after the manufacturer’s warranty has ended, check with your credit card provider to determine if theft and wear-and-tear damage are covered.
Protection against Warranty
In most circumstances, credit cards provide far more protection than debit cards. Customers who use their debit cards enjoy the same protection, but only if they report the fraud within 48 hours of discovering it.
Credit cards have cons
The most significant disadvantages of using credit cards are debt, credit score consequences, and expense.
Overspending can result in debt
You’re spending your bank’s money, not your own, when you use a credit card. At the very least, you must pay the minimum amount owing each month. It may be tough to keep up with monthly payments if you have large amounts on many cards.
The impact on credit scores
If you have a pattern of paying late or maxing out one or more of your credit cards, it might harm your credit history. Set up credit card notifications to keep you informed about payment deadlines and card balances so you don’t go over your credit limit.
Charges and interest
Your annual percentage rate is calculated using the credit company’s interest rate and costs (APR). Carrying a balance from month to month could cost you extra money if the APR is higher. If your card has an annual fee, you should be aware of it.
Debit Card
A debit card is a payment card that deducts money directly from a consumer’s savings account rather than relying on a bank loan to make payments. Debit cards, when issued by major payment processors like Visa or Mastercard, offer the same convenience as credit cards.
Categories of debit cards are available
- Standard debit cards: These Debit cards use your bank account as a source of funds.
- Electronic benefits transfer (EBT) cards: State and federal agencies provide electronic benefits transfer (EBT) cards to allow qualified users to use their benefits to make purchases.
- Prepaid debit cards: People without access to a bank account can use prepaid debit cards to make electronic purchases up to the amount preloaded on the card.
Unless customers spend more than their account balance, delegate cards have low or no associated fees. Annual fees, over-limit fees, late payment fees, and other penalties are common on credit cards. Activation and usage fees, among other things, are routinely charged on prepaid debit cards.
Debit cards have several advantages
Debit cards, like credit cards, have advantages and disadvantages.
Debt-free
A debit card uses money that the user currently has on hand, eliminating the possibility of debt. Retailers are well aware that card-paying customers spend more than cash-paying customers. Impulsive shoppers may escape the allure of credit cards by using debit cards to stick to their budget.
Anti-fraud measures
The key is reporting fraud or theft as soon as you realize it has occurred. The length of time it takes you to report a fraudulent transaction determines your responsibility. Some debit cards, issued by payment processors, are starting to offer more of the protections enjoyed by credit card users.
Free of charge every year
Debit cards, unlike many credit cards, do not impose an annual fee. Using your debit card to withdraw money from an ATM at your bank is also free. Credit cards may charge a cash advance fee as well as a high-interest rate in exchange for this convenience. However, if you want to keep your checking account open, you can pay additional costs.
The use of debit cards has cons
In terms of credit score impact and cost, debit cards are identical to credit cards.
There are no rewards
If you don’t have a reward checking account, you won’t be able to earn points, miles, or cash back on debit card transactions. Since rewards can save you compensation in respect to how you redeem them, you may be missing out if you only use your debit card.
Credit Score will not be built
Building good credit means demonstrating to lenders that you can repay the money you borrow in a timely manner. Because you can’t do that with a debit card linked to your bank account, using one alone won’t help you grow or construct a credit history.
Charges
Though debit cards have no fines, you may have to pay additional costs to open a checking account. These costs include monthly maintenance fees, overdraft fees if you overdraw your account, returned item fees, and foreign ATM fees if you use your debit card at a machine controlled by a different bank or financial institution.
You require at least one debit card and one credit card in your pocket. They are difficult to beat in terms of simplicity and security. But there are a few important differences that might have a huge influence on your wallet. Here’s how to figure out between the Debit Card vs Credit card which one to utilize based on your spending requirements.