Have you been in a situation where it has been difficult to choose between a debit card and a credit card? That should be quite understandable. Both credit and debit cards come with similar functionality and are accepted at the similar places. Both of them offer you the ease of cash handling as you do not need to carry cash anywhere. That indeed the reason for a credit card vs debit card debate.
But, they aren’t the same. The basic difference between the two lies in how do they pull the money. A debit card takes the money from your bank account, while a credit card charges it to your line of credit. Any money drawn from a debit card does not need to be repaid, while the same in the case of a credit card needs you to repay it along with the interest.
Debit vs Credit card – A Complete Overview
Both the credit and debit cards come with the same features. Both of them are powered by the major card issue and payment facilitation companies like MasterCard and Visa. You can use them for purchase at the retail outlets or withdraw money from the ATMs.
However, the key difference lies in how do they charge you money. When you make a purchase using a debit card, the amount is drawn from your bank account or the checking account that you have configured for use with the card. On the other hand, when you use a credit card – the amount is charged to your line of credit and you are charged for it at a later date.
Yet another specific difference that needs to be pointed out in a credit card vs debit card debate is a debit card can provide you an overdraft facility. A credit card has a limit to the amount you can spend on it. If you attempt spending an amount beyond that limit, you would be denied the credit.
The most important key features in this discussion would include
- A standard debit card is linked to your checking account.
- A prepaid debit card, on the other hand, involves an amount already paid and has a limit.
- A credit card is a debt instrument type. A debit card is not.
- The debit card can be used for an entire amount available in your checking account.
- A credit card comes with a limit specified by the card-issuing bank or company and is dependent on your repayment capability
Point to remember here is an unplanned use of credit card can leave you deep in debts. You need to observe some sort of caution and responsibility when using the credit cards. The interest on a credit card outstanding amount can be considerably high. Of course, you can have access to an interest free credit period. You would not need to pay any interest if you pay your dues within the period.
- Important – If you tend to make regular payments within the due dates, you can acquire reward points that can be redeemed for better deals. It can even help you improve the credit score.
What are the advantages and disadvantages of each?
Well, that should not necessarily mean you should not opt for a credit card. Both debit cards and credit cards come with their own advantages and disadvantages. Understanding them properly will help you get access to the best features of both of these cards.
How do they work?
In case of a credit card, you borrow money from a financial institution and pay back a part of it or the entire amount at the end of every month. The outstanding amount comes with an interest. The interest rates tend to be notoriously high. The exact rate of interest would be dependent on the institution you have taken the card from. The amount you can withdraw depends on the collateral security you have pledged at the time of opting for the card.
A debit card, on the other hand, takes the money from your checking account. It will not incur any sort of interest for you. There is no limit on the amount that you can withdraw. It is solely dependent on the funds available in your checking account.
The Pros and Cons
The pros that a credit card can offer can be summed up as
- It can help you build your credit score. Timely payments would assist you to improve your credit worthiness.
- Most of the credit cards offer you rewards in the form of loyalty points, gift cards and cashbacks.
- It gives you freedom of purchasing the products and services even when you have no access to immediate availability of funds.
However, it also has a few cons as well
- You will be liable to pay interest on the outstanding if you do not pay in time.
- It can induce the habit of overspending if you are not careful enough.
- There are additional charges like late payemnts
In the case of debit cards the pros can be summarised as
- The availability of cash is quite unlimited. You can get cash withdrawal options fro ATMs or make a purchase through retail or online outlets.
- There are zero interest charges
- You can track your activities and avoid overspending.
- You cannot use debit cards to build your credit history or creditworthiness
- There are no charges of any nature, but overdraft can incur interest
Credit card vs Debit card – Security and Safety
How safe are credit and debit cards? Understanding the safety parameters can be handy enough in understanding them and using them safely.
The funds are never withdrawn immediately in case of a credit card and it can take anywhere between one to three days to complete the transaction. If you suspect any fraud, you can immediately stop the transaction and raise a complaint. You can even block your card to prevent further fraud. Some cards even provide insurance for the purchases.
However, most of the credit cards offer a zero percent liability against frauds and misuse. If you want to take action against the fraudulent transactions, you need to complain in a timely manner.
The debit cards require a personal identification number for authorizing the transactions. Blocking your card would be easy if you have misplaced your card or suspect theft or fraud. Faster blocking is allowed through a mobile app or other online modes. A debit card offers liability to up to $ 50 in many cases. In some cases, the liability can be up to $ 500.
Who should go with a credit card?
In case you are not able to keep a tab on your spending habits, you should be content with a debit card instead of opting for a credit card. That way, you can prevent yourself from falling into a credit debt trap. Do note, however, that there are some rental agencies that insist on the credit card than on the debit card. This is perhaps with a view to having a window for charging you in case you demand the property you have rented.
In essence, credit cards offer you an extra source of funds and thus can be potentially a risky affair if you are a spendthrift. The credit cards come under the category of unsecured loans and thus come with a considerably high rate of interest. However, if you tend to pay off your bills in time, you would not need to pay any sort of interest.
Ultimately, it would be dependent on how would you be using your credit card. There are several reasons that support the contention that you should opt for a credit card. However, it is a decision you need to take after a due discussion and contemplation. It isn’t a decision you are expected to take on a whim. If you are ready to handle the long term consequences effectively and efficiently, there is no reason to prevent you from going with a credit card.
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