It is easy to confuse credit cards with debit cards. Both cards are the same size, have the same 16-digit card number, and include your name and the card’s expiration date. Both make cashless payments and withdrawing money from an ATM easy. But are they the same? No, they are not. A credit card and a debit card are completely different. A credit card allows the holder to borrow money from a bank while a debit card allows the holder to withdraw money from their savings account anywhere in the world. Keep reading to know the difference between credit card and debit card, their pros and cons and how to use them wisely!
This Blog Includes:
- Difference between Credit Card and Debit Card: An Overview
- Difference between Credit Card and Debit Card: Credit Cards
- Difference between Credit Card and Debit Card: Debit Cards
- Difference between Credit Card and Debit Card: FAQs
Difference between Credit Card and Debit Card: An Overview
With 16-digit card numbers, expiry dates, magnetic strips, and EMV chips, credit, and debit cards are nearly similar, and both can make buying in stores or online easy and convenient. Debit cards allow you to spend money by withdrawing funds from your bank account. Credit cards allow you to borrow money from the card issuer for transactions or cash withdrawals up to a specific limit.
In your wallet, you most likely have at least one credit card and one debit card. The convenience and safety they provide are hard to beat, but there are several key distinctions that might have a significant impact on your wallet. Here’s how to figure out which one to use based on your spending requirements.
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Difference between Credit Card and Debit Card: Credit Cards
A credit card is a card that allows the cardholder to borrow money from a financial institution, usually a bank. Cardholders agree to repay the money, plus interest, according to the conditions of the institution. Credit cards are available in the following categories:
- Standard credit cards provide their users with a credit line that they may use to make purchases, balance transfers, and/or cash advances, and they usually don’t have an annual fee.
- Concierge services, airport lounge access, special event admittance, and other benefits are available with premium cards, but they generally come with higher yearly costs.
- Customers who use rewards cards receive cashback, travel points, or other perks based on how they are using them.
- On balance transfers from another credit card, balance transfer cards offer low introductory interest rates and fees.
- Secured credit cards need an initial cash deposit, which is kept as collateral by the issuer.
- Charge cards don’t have a fixed spending limit, but they don’t usually let unpaid amounts carry over from month to month.
Pros of Credit Cards
Credit cards have certain advantages over debit cards, but they also have some disadvantages. Here’s a deeper look at the benefits of using credit cards to make transactions.
- Establish a credit history
The usage of a credit card is recorded on your credit report. This contains both good and negative items, such as on-time payments and low credit usage rates, as well as late payments and delinquencies. The information from your credit report is then used to calculate your credit scores.
- Purchase and warranty protections
Some credit cards may offer additional warranties or insurance on purchases in addition to those offered by the store or brand. Whether a credit card-purchased item becomes defective after the manufacturer’s warranty has ended, for example, it’s worth checking with the credit card company to see if it would cover the cost.
- Other benefits of using a credit card
Credit card customers can challenge unauthorized purchases or purchases of products that are damaged or lost after delivery under the Fair Credit Billing Act.
If the item was purchased using a debit card, the charge can only be reversed if the retailer accepts.
Cons of Credit Cards
The most significant disadvantages of using credit cards are debt, credit score implications, and expense.
- Overspending can lead you to Debt
When you use a credit card, you’re spending the bank’s money rather than your own. This money must be paid back, plus interest. You must at the very least make the minimum amount due each month. Having big balances on several credit cards might make it tough to keep up with monthly payments and put a burden on your finances.
Credit scores have an influence
Your FICO ratings may be improved by paying bills on time and keeping credit card balances low. However, if you have a habit of paying late, maxing out one or more of your cards, closing older accounts, or applying for new credit too frequently, you may harm your credit history.
- Fees and interest
You’ll have to pay back whatever you spend with interest because a credit card is essentially a short-term loan. Your annual percentage rate(APR) is calculated using the interest rate and costs charged by the credit business. Carrying a debt from month to month will cost you extra money if the card’s APR is higher.
We saw what a debit card is and its merits and demerits. Now, in the section on the Difference Between credit cards and debit cards, let us have a look at the merits and demerits of a debit card.
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Difference between Credit Card and Debit Card: Debit Cards
A debit card is a payment card that deducts money directly from a consumer’s checking account rather than relying on a bank loan. When issued by major payment processors such as Visa or Mastercard, debit cards provide the same convenience as credit cards and many of the same consumer protections.
There are two types of debit cards available, both of which do not require the customer to have a checking or savings account.
- Debit cards use your bank account as a source of funds.
- State and federal agencies issue electronic benefits transfer (EBT) cards to allow eligible users to use their benefits to make purchases.
- People without access to a bank account can use prepaid debit cards to make electronic purchases up to the amount preloaded on the card.
Pros of Debit Cards
Debit cards can have both positive and negative aspects, let’s look at the merits of debit cards:
- Avoid getting into debt
A debit card uses money that the user already has, eliminating the risk of going into debt. Retailers know that customers who pay with cards spend more than those who pay with cash. Impulsive spenders can avoid the temptation of credit and stick to their budget by using debit cards. This can assist you in staying clear of high-interest debt.
- Fraud protections
Furthermore, certain debit cards—particularly those provided by payment processors like Visa or Mastercard—are beginning to offer some of the same protections as credit cards.
- There are no yearly charges
Debit cards, unlike many credit cards, do not have an annual fee. There’s also no charge for using your debit card to withdraw cash from an ATM at your bank. For such convenience, credit cards might impose a cash advance fee as well as a high interest rate. You may, however, pay additional fees to keep your checking account open.
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Cons of Debit Cards
Debit cards have similar drawbacks to credit cards in terms of credit score impact and cost.
- There are no incentives
You won’t earn any points, miles, or cash back on debit card transactions unless you have a reward checking account. Because rewards can save you money depending on how you redeem them, if you just use your debit card, you may be missing out.
- It’s not going to help you build credit
Building excellent credit entails proving to lenders that you can return the money you borrow properly. You can’t do that when you use a debit card connected to your bank account, therefore using a debit card alone won’t help you develop or build a credit history.
Although there are no yearly fees with debit cards, you may have to pay extra costs to establish a checking account. Monthly maintenance costs, overdraft fees if you overdraw 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 expenditures.
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Difference between Credit Card and Debit Card: FAQs
The question “Do you want to pay now or later?” is the major difference between these two cards. A debit card is linked to your checking or savings account, and when you use it, money is taken out of your account within 24 hours. A credit card can be used to pay for products and services right now, but you must pay for them when your monthly bill arrives.
Yes, in the vast majority of cases. If your debit card is stolen, the money in your accounts is immediately accessible. If your credit card is stolen, you do not lose any money from your checking or savings account. When you report a card stolen, banks will block your account, but you will be responsible for more than if your credit card is stolen or used.
You can get a cash advance from your line of credit by using your credit card at an ATM. Most credit cards, on the other hand, charge hefty fees for taking out what amounts to a short-term loan from your creditor. If you need cash, your debit card may be a better option.
A credit card can help you build a credit history and will come in handy in an emergency. If your credit card is stolen, you will be less responsible for charges than if your debit card is stolen, but you face the danger of going into debt with charges you can’t afford to pay back. Consumers who pay attention to their purchases and pay on time can benefit from both cards.
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