Credit Cards vs. Debit Cards: An Overview
Credit and debit cards are essentially similar in appearance, with 16-digit card numbers, expiry dates, magnetic strips, and EMV chips. With one major distinction, both may make it simple and convenient to make purchases in shops or online. Debit cards enable you to spend money by drawing on funds in your bank account. Credit cards enable you to borrow money from the card issuer up to a specific limit in order to make purchases or withdraw cash.
You most likely have one credit card and one debit card in your wallet. They provide unrivaled convenience and security, but there are significant distinctions that might have a significant impact on your wallet. Here’s how to choose the best one for your spending requirements.
- Credit cards allow you access to a bank’s line of credit, while debit cards remove money straight from your bank account.
- When compared to debit cards tied to a bank account, credit cards provide superior consumer protection against fraud.
- Newer debit cards provide better credit card-like security, and many credit cards no longer impose yearly fees.
- When comparing credit cards with debit cards connected to a bank account, the costs and advantages must be considered.
Investopedia / Sabrina Jiang
What Is a Credit Card?
A credit card is a plastic card provided by a financial organization, usually a bank, that allows the cardholder to borrow money from that institution. Cardholders agree to repay the money with interest according to the rules of the institution. Credit cards are available in the following categories:1
- Standard cards merely provide its users with a line of credit for purchases, debt transfers, and/or cash advances, and they often have no annual charge.
- Premium cards include privileges such as concierge services, airport lounge access, special event entry, and more, but their yearly fees are often higher.
- Customers who use rewards cards might get cash back, travel points, or other advantages depending on how much they spend.
- Balance transfer cards provide low introductory interest rates and do not charge fees for balance transfers from another credit card.
- Secured credit cards need an initial cash deposit that is retained as collateral by the issuer.
- Charge cards do not have a predetermined spending limit, but they often do not allow unpaid amounts to roll over from month to month.
By utilizing rewards cards, credit card users may earn cash, discounts, travel points, and a variety of other benefits not accessible to debit cardholders. Rewards may be applied in a flat-rate or tiered manner. For example, you may have one card that gives limitless two miles per dollar spent and another that offers three miles per dollar spent on travel, two miles per dollar spent on eating, and one mile per dollar spent on everything else. You may then use the miles you earned to schedule future trips.
When selecting a rewards card, consider if the incentives may expire and what choices you have for redeeming them.
Pros of Using Credit Cards
Credit cards have several benefits over debit cards, but they also have some disadvantages. Here’s a deeper look at the benefits and drawbacks of using credit cards to make purchases.
Build Credit History
Credit card usage appears on your credit report. This covers both good and negative information, such as on-time payments and low credit usage percentages, as well as late payments or delinquencies. The information in your credit report is then utilized to determine your credit scores. Responsible spenders may improve their ratings by maintaining a history of expenditures and regular payments, as well as by keeping their card balances low in comparison to their card limitations. 1
As a card benefit, several credit card providers provide free credit score monitoring and tracking, allowing you to keep track of your progress while developing credit.
Warranty and Purchase Protections
Some credit cards may also give supplementary warranties or insurance on bought products in addition to those provided by the shop or brand. For example, if a credit card-purchased item becomes damaged after the manufacturer’s warranty has ended, it is worth checking with the credit card company to see whether coverage is available. Alternatively, you may have purchase and price protection built in to assist you replace stolen or lost things, or reimburse price discrepancies when the item you bought is offered for less elsewhere. 2
As long as the client notifies the loss or theft promptly, their maximum culpability for transactions made after the card has vanished is $50. The Electronic Fund Transfer Act provides debit card holders with the same protection against loss or theft—but only if the loss or theft is reported within 48 hours of discovery. The card user’s responsibility increases to $500 after 48 hours, and there is no limit after 60 days.3
Credit cards, in most circumstances, provide much stronger fraud protection than debit cards.
Other Credit Card Advantages
Credit card customers may utilize the Fair Credit Billing Act to challenge fraudulent transactions or purchases of items that are damaged or lost during shipment. 4 If the item was purchased using a debit card, the charge cannot be reversed unless the retailer agrees. Furthermore, victims of debit card theft do not get a reimbursement until an investigation is concluded. 5
The credit cardholder, on the other hand, is not liable for the disputed charges; the money is normally deducted immediately and only recovered if the dispute is dropped or resolved in favor of the retailer. Despite the fact that certain credit and debit card companies give 0% liability protection to their clients, the law is significantly more lenient to credit cards.
If you need to rent a vehicle, many credit cards include a collision insurance waiver. 6 Even if you intend to use a debit card, many automobile rental companies want credit card information as a backup. A customer’s sole option may be to enable the rental agency to store a few hundred dollars on a bank account debit card as a type of guarantee deposit.
Cons of Using Credit Cards
The primary disadvantages of using credit cards include debt, credit score consequences, and expense.
Spending Can Lead to Debt
When you use a credit card to make a transaction, you are spending the bank’s money, not your own. This money must be returned, together with interest. You must at the very least make the minimum amount due each month. Having big balances on many cards might make it tough to keep up with monthly payments and put a strain on your budget.
Credit Score Impacts
Paying your bills on time and keeping credit card balances low will improve your FICO ratings. However, if you fall into the practice of paying late, maxing out one or more of your cards, closing older accounts, or applying for new credit too often, you may harm your credit history.
Set up credit card notifications to keep you informed of payment due dates and card balances, allowing you to pay on time and avoid exceeding your credit limit.
Interest and Fees
Because a credit card is really a short-term loan, you’ll have to pay interest on everything you spend. Your annual percentage rate is calculated using the interest rate and costs charged by the credit business (APR).The greater the APR on the card, the more it will cost you to carry a debt month after month.
You should know whether your card has an annual fee, a foreign transaction cost, a balance transfer fee, a cash advance fee, a late payment fee, or a returned-payment fee. As a general rule, the greater the annual fee, the better the credit card’s rewards program and the more perks it provides.
What Is a Debit Card?
A debit card is a payment card that deducts money directly from a consumer’s checking account rather than borrowing money from a bank or card provider. When issued by major payment processors such as Visa or Mastercard, debit cards provide the convenience of credit cards as well as many of the same consumer safeguards. 7
There are two varieties of debit cards that do not need a bank or savings account from the consumer, as well as one regular type.
- Standard debit cards deduct funds from your bank account.
- State and federal agencies provide electronic benefits transfer (EBT) cards to enable qualified users to utilize their benefits to make purchases. 8
- Prepaid debit cards enable consumers who do not have access to a bank account to make electronic purchases up to the amount preloaded on the card.
Frugal shoppers may choose to use debit cards since there are typically little or no costs connected with them, unless they spend more than they have in their account and suffer an overdraft charge. (This benefit does not apply to prepaid debit cards, which commonly impose activation and use fees, among other charges.) Credit cards, on the other hand, often include yearly fees, over-limit fees, late payment fees, and a slew of additional penalties, in addition to monthly interest on the card’s outstanding amount.
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How Debit Cards Work
Pros of Using Debit Cards
Debit cards, like credit cards, may have advantages and disadvantages.
A debit card uses money that the user already owns, removing the risk of incurring debt. Retailers know that when individuals use card instead of cash, they tend to spend more. 9 Impulsive spenders may avoid the lure of credit and stick to their budget by utilizing debit cards. This may help you avoid high-interest debt.
Credit cards used to provide significantly stronger fraud protection than debit cards. Some debit cards, especially those provided by payment processors such as Visa or Mastercard, are beginning to offer more of the safeguards that credit card users enjoy.
The key is to report fraud or theft as soon as you become aware of it. The time range in which you report fraudulent transactions determines your culpability. If you wait too long to notify the bank that your card has been used for illicit transactions, you may be held liable for part or all of the losses.
Because a debit card is directly connected to a bank account, fraudulent transactions may rapidly deplete an account or result in an overdraft. This cannot happen with credit cards since they are paid back later.
No Annual Fee
While many credit cards have yearly fees, debit cards do not. There is also no cost for using your debit card to withdraw cash from an ATM at your bank. Credit cards, on the other hand, may levy a cash advance fee as well as a high interest rate for the convenience. However, you may have to pay additional fees to keep your checking account open.
Credit card cash advances do not have a grace period; instead, interest starts collecting immediately.
Cons of Using Debit Cards
The main disadvantages of using debit cards, like with credit cards, are credit score implications and expense.
You will not earn points, miles, or cash back on debit card transactions unless you have a rewards checking account. Because rewards may save you money depending on how you redeem them, if you just use a debit card, you may be losing out.
Won’t Build Credit
Building excellent credit entails showing to lenders that you can repay money borrowed properly. Because you can’t do that when you use a debit card connected to your bank account, using a debit card alone won’t help you develop or build a credit history.
Although there are no annual fees for debit cards, you may have to pay extra costs to establish a checking account. Monthly maintenance costs, overdraft fees if you overspend from your account, returned-item fees, and international ATM fees if you use your debit card at a machine owned by another bank or financial institution are examples of these.
Are Debit Cards the Same as Credit Cards?
While they may seem identical and share characteristics such as 16-digit card numbers, expiry dates, and branded Visa or MasterCard logos, credit cards and debit cards vary significantly. The main distinction is that debit cards are tied to a bank account and draw straight from it (similar to a check).A credit card, on the other hand, does not draw money instantly and must be paid back later, subject to any incurred interest costs.
Can You Earn Rewards With a Debit Card?
Usually, no. While debit cards do not earn points or miles for every purchase, the accounts from which they draw cash may reward users for a limited number of transactions. Standard debit cards also often have a round-up function that enables users to transfer modest sums of money to a savings account, a feature that credit cards do not provide.
Do All Credit Cards Charge Interest?
While 0% interest promos are common, all credit cards ultimately charge interest on amounts that roll over from month to month. The annual percentage rate is used to calculate this interest rate (APR).Pay your bill in full every month to avoid incurring interest in the long run.
Can Anyone Get a Credit Card?
Most individuals can apply for and acquire a credit card, but if they have a history of poor credit or no credit, the credit cards available to them may be less beneficial. Those with no or extremely poor credit may apply for a secured credit card, in which the credit limit is secured by a deposit made when the card is opened. Higher credit ratings are required for more appealing rewards cards.
Is a Credit Card Safer Than a Debit Card?
Credit cards often provide more consumer safeguards against fraudulent transactions than debit cards. These fraud safeguards may not be as generous or easy to apply to debit card transactions.
The Bottom Line
Credit and debit cards may seem similar, but their advantages and disadvantages are vastly different. If you value developing credit and earning rewards, credit cards are critical tools for your financial path. A debit card is a better option if you wish to have a closer grip on your money. Whatever you select, be sure you understand the costs connected with each account.
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