How Do Debit and Credit Cards Differ?
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Long ago, physical money (bills and coins) was put to rest in favor of debit and credit cards. Today, most people have at least one debit card and one credit card in their wallets/purses.
At the same time, not everyone has a clear understanding of the similarities and differences between these two primary means of exchange for goods and services.
With that in mind, we want to use the following discussion to focus on a comprehensive comparison between debit and credit cards.
The Similarities and Differences Between Debit and Credit Cards
The similarities between debit and credit cards are pretty much straightforward. They look the same with a 16-digit card number, EMV chip, and magnetic strip on the back. They are also generally the same size.
Additionally, you can use both debit and credit cards for in-person and online transactions.
These two payment cards differ in the fact that debit cards are only issued by a bank or credit union. In contrast, credit cards can be issued by banks or any other payment processing institution (VISA, American Express, MasterCard, etc.).
The most notable difference between these two options is with what financial resources back each type of card.
A standard debit card connects directly to the user's bank account. Therefore, the user can only use their debit card to the extent they have money in the connected account. If no money is in that account, transactions are declined.
Funds are accessed at an ATM or a card reader as a debit card transaction when used along with a personal identification number (PIN).
A debit card customer may also swipe their card when making a purchase, making it seem similar to a credit card purchase, but with funds still being immediately removed from their attached checking account, unlike credit cards.
Credit cards are tied to the borrowing agreement the user has with the credit card issuer. As part of that agreement, the credit card issuer will designate a borrowing limit by which the borrower must abide.
When cardholders use their credit card, they're effectively borrowing the financial resources needed to make the purchase.
They can continue using their credit card until they hit their credit limit. After that, the next transaction will be declined until at least some of the outstanding balance is paid down. Alternatively, the user can attempt to get a borrowing limit increase, sometimes right at the point of purchase.
The Advantages and Disadvantages of Using a Debit and Credit Card
Both debit and credit cards offer particular advantages and disadvantages. Based on these pros and cons, each person must decide which option will best serve their needs as a consumer and for what transactions. Let's take a comparative look.
Advantages of Debit Cards
- Helps control spending because user is limited to what they have in their connected bank account
- No interest charges because user is not creating debt
- No annual servicing fee charged by the bank
- Fraud protection if fraudulent transactions are reported in a timely manner
- Easy to withdrawal cash through ATM machines
Disadvantages of Debit Cards
- Generally don't earn rewards points for transactions
- Using a debit card in no way helps the user build their credit score
- Service fees are faced on cash transactions (ATM Fees), plus a possible service charge for maintaining the bank account, or potential overdraft fees if you do spend more than is in attached account
Benefits of Credit Cards
- Prevents criminals from accessing a user's personal financial resources
- Fraud protection for timely reported fraudulent charges ($50 limit on exposure and many lenders offer zero liability protection)
- Offers ability to improve one's credit score and build credit
- Offers rewards you can use for cash rebates, travel and consumer goods
- Warranty protection on the purchase of certain “big-ticket” consumer goods
- Potential to receive a cash advance at an ATM (with a fee)
Drawbacks of Credit Cards
- Your unpaid balance and new charges incur interest (usually at a double digit rate) if not fully paid in the subsequent billing
- Debt accumulation that could lead to debt and financial problems
- Promotes the opportunity to overspend beyond one's means
- A missed monthly payment is reflected in credit history and impact credit score
- Annual fee requirements in many cases – other fees may also apply, such as balance transfer, cash advance, foreign transaction, or late payment fees
When Should You Use a Debit or Credit Card?
If you have access to both a debit and charge card, you'll constantly face making financial decisions. The choices between when to use each payment method and under what circumstances you use them.
It'll likely come down to your financial health when decision time arrives. As a general rule of thumb, it's always best to avoid debt whenever possible.
If you have discretionary money in the bank, your debit payment card offers the best way to control your everyday purchases and other discretionary spending. That's also applicable if you're using your debit card to pay monthly expenses.
Honestly, it's not difficult to make the decision to use a debit card. If you have money in the bank, the fiscally responsible thing to do is pull out the debit card and use it.
But if you're concerned you might need financial protection for a purchase you've made, opt for a credit card instead.
Most should reserve using credit cards for extraordinary occurrences. Why? The cons of credit cards.
The possible accumulation of debt is not something you should take lightly. The potential for hefty interest charges and possible debt issues should be cause for pause.
With that said, there are circumstances when your credit card might be the right call, including:
- Covering the cost of an unexpected medical or car emergency
- Trying to accumulate rewards points to cover planned travel costs
- Purchasing of big-ticket items like refrigerator/computer/furniture
- Taking advantage of credit card company promotions
- Establishing extra warranty protection on a purchased item
- Building credit score in advance of a big purchase (car/house)
Using Your Credit Card Responsibly
If, for any reason, you do purchase goods or services with your credit card, you should do so with the best of intentions.
That includes not allowing yourself to get into debt beyond what you can afford to pay in credit card payments month to month. Your credit cards APR (interest rate) should always be a concern.
As a rule of thumb, always try to pay off your credit card balance in full during the grace period. If you can't pay off the whole balance, your next best option would be to pay as much as you can afford with each statement your receive.
No matter what, you need to make sure you always make the minimum payment required by the issuer.
As long as you follow these guidelines, you should be able to keep your financial status and credit score in good standing.
The bottom line is this. When you have a plan and exercise good financial judgment, there's nothing wrong with using both your debit and credit card as you see fit.
Written by Women Who Money Cofounders Vicki Cook and Amy Blacklock.
Amy and Vicki are the coauthors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.