What is the Difference Between Debit and Credit Cards?
Ever found yourself confused about the difference between credit and debit cards? Since both cards look pretty much the same when you’re at the checkout, it’s easy to see why. Read along to find out the difference between debit and credit cards.
Let’s dive right in!
Debit vs. Credit: A Glimpse
Usually, credit and debit cards look the same. Design-wise, the cards include 16-digit numbers, as well as expiration dates, EMV chips, magnetic strips.
While both a credit card and a debit card can be used for purchasing services or goods, there is one essential difference. Namely, a debit card uses money deposited in your account to pay for your purchases. In comparison, with a credit card, you can borrow a limited amount of funds from your bank for purchases or withdrawals.
Furthermore, credit cards also have a credit line based on how creditworthy a cardholder is. It’s up to the cardholders to decide how they will spend their credit line, and they are typically charged monthly.
Contrastingly, debit cards could use an overdraft credit line for overspending. A credit card has a defined credit amount on it. So if a user tries to spend over the specified limit while paying by card, it will be declined.
How Does a Debit Card Work?
A debit card payment allows members to make purchases by using money deposited in their checking account, as opposed to taking a loan from the bank. Debit cards are just as convenient as credit cards, and the majority of them offer the same user protections when provided by giants like Mastercard or Visa.
There are three types of debit cards:
- Standard debit cards – withdraw funds from your account;
- Prepaid cards – made for people without bank accounts to use for purchases up to a specific preloaded amount;
- Electronic benefits transfer cards – provided by government agencies to eligible users that can use their perks for purchases.
Cardholders who are more sparing in terms of spending generally enjoy debit cards more. Debit card charges typically don’t include fees, except if a user overspends and has to be charged an overdraft fee. On the other hand, in addition to the monthly interest, credit cards charge annual fees, as well as late payment and over-limit penalties.
Debit Card Benefits
Debit card users can enjoy plenty of benefits depending on the card type and the issuer. Let’s check out some of the most common ones:
Eliminating the risk of debt
Since a debit card transaction uses the funds a user already has in their account, the possibility of accumulating debt is lower. Furthermore, debit cards make it easier for impulsive shoppers to spend within their budget.
No annual fee
While the majority of credit cards charge annual fees, debit cards don’t charge membership fees, nor ATM withdrawal fees. However, you might be charged a small amount for the maintenance of your account.
Major payment processors like Mastercard and Visa are offering excellent user protection services among other debit card benefits. The most important thing is reporting any signs of fraud or theft the moment you find out. However, if you wait too long to inform your issuer, you could potentially be held accountable for your losses.
How Does a Credit Card Work?
The primary difference between debit and credit cards is that credit cards are payment cards mainly issued by a bank, giving users the option to borrow money. Cardholders sign an agreement that they will pay the amount back with interest. The categories of credit cards include:
- Standard cards – These cards use a line of credit to allow their users to make purchases, cash advances, balance transfers, and don’t charge annual fees.
- Premium cards -You can use these cards to enjoy benefits including access to airport lounges, special events, and concierge services, but keep in mind that they come with higher fees.
- Rewards cards – Cardholders can take advantage of cashback or collect travel points when paying by card.
- Balance transfer cards – These cards are for you if you’re looking for low-interest rates and fees for balance transfers from another card.
- Secured credit cards – A secured card requires a security deposit held by the bank as collateral and is an excellent option for building or improving credit.
- Charge cards – Although charge cards don’t have a specified spending limit, they don’t allow unpaid balances to transfer to the next month.
Unlike debit cardholders, credit cardmembers can appreciate many additional perks thanks to rewards cards. Rewards can be claimed on a flat-rate or tiered rate basis.
Benefits of Using a Credit Card
Both credit card and debit card users can enjoy various perks. Here are some advantages you can expect when choosing a credit card:
Building and improving credit score
Your credit report shows how you use your credit card. It includes positive events in your credit history like on-time payments, but also late payments. This information is later used for the calculation of your credit score. The score can be raised by making payments on time and keeping a low credit utilization rate.
In comparison to debit cards, credit cards offer stronger protection. If a user reports fraud, loss, or credit card info theft on time, the maximum liability for purchases after the card disappearance will be $50.
Some banks issue credit cards with extra warranty or insurance in addition to those a retail store or a brand provides. For instance, if an item purchased with a credit card malfunctions after the manufacturer’s warranty is over, you can consult your credit card issuer to see if it can possibly offer coverage.
Read more: Benefits of Credit Cards
Credit Card vs. Debit Card: The Final Verdict
All in all, both credit and debit cards are useful tools for making purchases at retail stores or subscribing to services. However, choosing the right card depends on the customer’s needs and spending habits.
If you tend to overspend or have a stricter budget, a debit card may be the perfect solution. On the other hand, a credit card is better for building credit history and can get you out of an emergency.
How is a credit card different from a debit card?
Credit and debit cards look pretty much the same. However, you can tell the card is debit by the “Debit” sign located on the top or bottom corner.