What is the difference between a credit card and a debit card?
Credit vs Debit Cards: An Overview
Credit and debit cards often look almost identical, with a 16-digit card number, expiration date, and personal identification number (PIN). Both make shopping in a store or online simple and convenient, but there is one key difference. A debit card allows you to make use of the funds you already have in the bank by spending your credit card. Credit cards allow you to borrow up to a certain limit from the card issuer to purchase items or withdraw cash;
You probably have at least one credit card and one debit card in your wallet. The convenience and protection they offer are hard to beat, but they have important distinctions that can seriously impact your wallet. Here’s how to decide which one to use for your consumer needs.
KEY TAKEAWAYS
- Credit cards give you access to a bank-issued debt limit, while debit cards debit money directly from your bank account.
- Credit cards are better at protecting consumers from fraud than debit cards for bank accounts.
- Newer debit cards offer more credit card-like protection, and many no longer charge an annual fee.
- When comparing credit or debit cards associated with bank accounts, it’s important to consider fees and benefits.
What is a credit card?
A credit card is a card issued by a financial institution (usually a bank) that enables the cardholder to borrow funds from the institution. Cardholders agree to pay back the money, along with interest, according to the agency’s terms.
There are four categories of credit cards:
- Standard card; simply offers its users a line of credit for purchases, balance transfers, and/or cash advances.
- Rewards cards; offer cash back, travel points, or other benefits to customers based on how they spend.
- A secured credit card; requires the issuer to hold an initial cash deposit as collateral.
- Credit cards; no preset spending limits, but usually do not allow unpaid balances to be carried over from month to month.
Credit card users can get cash, discounts, travel credits, and many other perks that debit cardholders can’t get by using a rewards card. Rewards can be done at a flat rate or tiered rates. For example, you might have one card that offers 2 miles per dollar of unlimited miles on purchases, and another card that offers 3 miles per dollar on travel, 2 miles per dollar on dining, and 1 mile per dollar on everything else. You can then use the miles earned to book future travel arrangements.
When choosing a rewards card, be aware of whether rewards will expire and what redemption options you have.
Benefits of using a credit card
Credit cards have certain advantages over debit cards, but also some disadvantages. Let’s take a closer look at the pros and cons of using a credit card to spend.
Build a credit history
Credit card usage is reflected on your credit report. This includes positive histories such as on-time payments and low credit utilization, as well as negative items such as late payments or delinquencies. Your credit report information is then used to calculate your credit score. Responsible consumers can improve their score with historical spending and timely payments, and keep their card balances low relative to their card limits.
Many credit card companies offer free credit score monitoring tracking as a credit card offer, so you can keep an eye on your progress as you build your credit card.
Warranty and Purchase Protection
Some credit cards can also provide additional warranties or insurance on purchases other than those offered by retailers or brands. For example, if an item purchased with a credit card is defective after the manufacturer’s warranty expires, it’s worth checking with the credit card company to see if it offers coverage. Alternatively, you may have built-in purchase and price protection to help you replace stolen or lost items, or refund the difference if your purchase is sold elsewhere for a lower price.
Fraud Protection
In most cases, credit cards offer greater protection than debit cards. As long as the customer reports the loss or theft in time, the maximum liability for the purchase after the card disappears is 50 yuan. This electronic funds transfer law provides debit card customers the same protection against loss or theft, but only if the customer reports it within 48 hours of discovery. After 48 hours, cardholder liability rises to $500; after 60 days, there is no limit.1
Other credit card benefits
The Fair Credit Checkout Act; allows credit card users to dispute unauthorized purchases or purchases of items that were damaged or lost in transit. 2But if the item was purchased with a debit card, it cannot be reversed unless the merchant wants to. What’s more, victims of debit card theft won’t get their money back until the investigation is over.
Cardholders, on the other hand, are not assessed for the disputed fee; the amount is usually debited immediately and only reinstated when the dispute is reversed or resolved in favor of the merchant. While some credit and debit card providers offer customers zero liability protection, the law is far more lenient with credit cardholders.
Many credit cards offer waivers if you need to rent a car. Even if you want to use a debit card, many rental car companies require customers to provide credit card information as a backup. For customers, the only way out may be to allow rental companies to place a few hundred dollars on their bank account debit cards as a secured deposit.
Disadvantages of using a credit card
The main disadvantages of using a credit card center on debt, credit score, and cost.
spending money leads to debt
When you shop with a credit card, you’re spending your bank’s money, not your own. The money must be paid off, plus interest. At a minimum, you must pay a minimum monthly payment to your card. Accumulating high balances on multiple credit cards can make it hard to keep up with your monthly payments and put a strain on your budget.
Credit Score Impact
Paying bills on time and keeping credit card balances low can help your working FICO score. However, if you develop a habit of late payments, max out one or more credit cards, close old accounts, or apply for new ones too frequently credit card, misuse of your credit card can damage your credit history.
Set up credit card reminders to notify you of payment due dates and credit card balances so you can pay on time and avoid exceeding your credit limit.
interest and fees
Since a credit card is essentially a short-term loan, you will have to pay back the interest you spend. The interest rates and fees charged by the lending company are used to calculate the Annual Percentage Rate (APR).
In terms of fees, you should understand whether your card has an annual fee, external transaction fee, balance transfer fee, cash advance fee, late fee, or chargeback fee. Generally speaking, the better the rewards program on a credit card, the more benefits it offers, and the higher the annual fee.
What is a debit card?
A debit card is a payment card that debits a consumer’s checking account directly rather than taking a loan from a bank. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors such as Visa or MasterCard.
There are also two types of debit cards that do not require customers to have a checking or savings account, and one that is the standard type:
- A standard debit card withdraws money from your bank account.
- Electronic benefit transfer cards are issued by state and federal agencies to allow eligible users to use their benefits to make purchases.
- Debit cards provide a way for people without access to a bank account to make electronic purchases for amounts up to the amount preloaded on the card.
Frugal consumers may prefer to use a debit card, as there are often few or no associated fees unless the user spends more than their account and incurs an overdraft fee. (The no-fee advantage does not apply to debit cards. By contrast, credit cards typically charge annual fees, over-limit fees, late fees, and other substantial penalties in addition to monthly interest on unpaid balances.
How Debit Cards Work
The benefits of using a debit card
Debit cards, like credit cards, have both good and bad sides.
avoid debt
Debit cards take advantage of the funds users already have, eliminating the danger of accumulating debt. Retailers know that people often spend more when using plastic cards than when paying cash. By using debit cards, impulsive consumers can avoid the lure of credit and stick to their budgets. This can help you get out of high-interest debt.
Fraud Protection
Additionally, some debit cards, especially those issued by payment processors such as Visa or MasterCard, are starting to offer more protection to credit card users.
The key is to report fraud or theft as soon as you become aware of it. Your liability for fraudulent purchases depends on the time frame of the report. Waiting too long and letting the bank know that your card has been used for an unauthorized purchase could result in you being liable for any and all losses.
No annual fee
While many credit cards charge an annual fee, debit cards do not. There is no charge to withdraw cash with a debit card at a bank ATM. On the other hand, credit cards can charge a cash advance fee plus a high-interest rate for convenience. However, you can pay other fees to maintain your checking account.
There is no grace period on a cash advance on a credit card; instead, interest starts accruing right away.
Disadvantages of using a debit card
Similar to credit cards, the biggest downsides to using debit cards focus on credit score impact and cost.
no reward
You will not earn any points, miles, or cash on your debit card unless you have rewards checking account. Since rewards can save you money, depending on how you redeem them, you might miss out if you only spend your debit card.
won’t build credit
Building good credit means demonstrating to lenders that you can repay the loan responsibly. When you spend with a debit card linked to your bank account, you don’t have the opportunity to do so. So just using a debit card won’t help you build your credit history.
cost
While there is no annual fee for a debit card, you can pay additional fees to open a checking account. Includes monthly maintenance fees, overdraft fees if you use your debit card on machines at other banks or financial institutions, fees for overspending on your account, return fees, and foreign ATM fees.
