What is the difference between a credit card and a debit card?
Cards vs. Debit Cards: Credit card and debit card look similar. Both cards have a 16 digit card number. Expiry date is written on it. And EMV chip is attached. And a magnetic strip is also attached to the card. We can do online and offline shopping with both the cards and it is very convenient. It is very easy to use.
But there is a lot of difference between these two cards, like in debit card you can withdraw and use your deposited money anytime but you can withdraw and use only that much money which is in your account. On the other hand, with credit card you can withdraw money only up to a certain limit to buy something or withdraw cash. You can borrow only as much from the credit card as per the limit set by the issuer.
In today's time, everyone has a credit card and a debit card. But very few people know which card should be used and what is the difference between the two. Both these cards look similar but their functions are different. Today in this article we will tell you when to use which card and how to decide it.
What Is a Credit Card?
A credit card is a card that is issued by a bank and enables the customer to borrow money from that bank. The customer has to agree to pay the money back to the bank on the due date along with interest on the amount withdrawn from the credit card. Credit cards are issued in the following different types:
1. Standard cards-
Standard cards are the cards that allow their customers to make any purchase, borrow money advance and transfer money and do not charge any annual fee.
2. Premium cards-
A premium card is a card that offers perks like concierge services, access to airport lounges, access to special events, etc. but they charge a higher annual fee.
3. Rewards cards-
Rewards cards are cards that offer several benefits to customers such as cash back, travel points etc. based on their spending.
4. Balance transfer cards-
A balance transfer card is a card that charges a low interest rate and fees on balance transfers from another credit card.
5. Secured credit cards-
A secured credit card is a card that requires an initial cash deposit in the account that is held as collateral by the issuer.
6. Charge cards-
Charge cards are cards that have no prepaid spending limits, and they do not allow unpaid balances to be carried forward from month to month.
Credit card holders get many benefits like cash back, discounts, travel points, etc. by using rewards cards that are not available to debit cardholders. Rewards can be applied on a flat-rate basis or at tiered rates.
For example: you may have a card that offers unlimited two miles per dollar on purchases and another that offers three miles per dollar for travel expenses, two miles per dollar for dining, and one mile per dollar for everything else. You can then use the miles you earn to book future travel arrangements.
Benefits of using a credit card
Credit cards have some advantages over debit cards, however they can also have some disadvantages. Take a look at the advantages and disadvantages of using a credit card, which are mentioned below.
Build Credit History
Credit card users appear on your credit report. This includes positive history, such as making on-time payments and a low credit utilization ratio, as well as negative items, such as late payments or delinquencies. Your credit report shows how you use your credit cards and determines your credit score.
Responsible spenders can increase their credit scores by keeping track of their spending history and timely payments, as well as always trying to keep card balances below their card limits.
Warranty and Purchase Protections
Some credit cards also offer additional warranties or insurance on items purchased that go beyond the warranty offered by the retailer or brand.
For example: if an item purchased with a credit card turns out to be defective after the manufacturer's warranty has expired, it's worth checking with the credit card company to see if it will provide coverage. Or you may have purchase and price protection built in that helps you replace stolen or lost items, or refund the price difference when the item you bought is sold for a lower price somewhere else.
Fraud Protection
Sometimes a credit card is lost because the customer does not report the card as stolen or misplaced in time. In this case, the maximum liability is $50 for purchases made after the card is lost. The Electronic Funds Transfer Act offers debit card customers similar protection from loss or theft – but only if the customer reports it within 48 hours of discovery. After 48 hours, the card user's liability increases to $500; after 60 days, there is no limit. That's why the cardholder should report as quickly as possible.
Other Credit Card Advantages
The Fair Credit Billing Act allows every credit cardholder to dispute unauthorized purchases or the purchase of goods damaged or lost during shipping. If the item was purchased with a debit card, the charge cannot be refunded unless the merchant is willing to do so.
In addition, victims of debit card theft do not receive their refund until the investigation is complete.
On the other hand, the credit cardholder is not responsible for disputed charges; money is usually deducted immediately and returned when the dispute is resolved in the merchant's favor. Although some credit and debit card issuers offer zero liability options to their customers, the law is much more forgiving of credit cardholders.
For example: you have to rent a car, many credit cards issue some type of collision waiver. Whether you use a debit card or a credit card, some car rental agencies may ask for your credit card information as a backup. The rental agency may be allowed to hold perhaps a few hundred dollars on the debit card of the customer's bank account as a security deposit.
Disadvantages of Using Credit Cards
The main disadvantages of using credit cards include debt, impact on credit score, and cost.
1. Withdrawing excess loan amount may increase your debt-
One disadvantage of a credit card is that you can use it to withdraw more money than you can afford, on which you have to pay interest and you have to make a minimum payment every month. This can affect your budget and on some credit cards, due to the high balance, it becomes difficult to make monthly payments. Therefore, you should use a credit card wisely so that your budget is not affected.
2. Credit Score Impacts-
Paying your credit balance on time and drawing less amount from credit card maintains your FICO (Fair Isaac Corporation) score. If you misuse credit card then it harms your credit score. If you make late payments or you use more than one credit card or you apply for new credit card frequently then it can harm you, so use credit card properly.
3. Interest and Fees-
credit card is basically a short-term loan, you will have to pay interest on the loan you take. The interest rate and fees charged by the credit card company are used to calculate your annual percentage rate (APR). The higher the card's APR, the more it will cost you to carry a balance from month to month. So borrow as little credit amount as possible in case of an emergency.
As a general rule, the more benefits offered by a credit card issuer, the higher the fees. You should always be aware of whether your credit card will charge an annual fee, foreign transaction fee, balance transfer fee, cash advance fee, late payment fee or not.
What Is a Debit Card?
A debit card is a card that gives the debit card holder money by deducting money directly from their account rather than borrowing money from a bank or card issuer. Debit cards also offer the convenience of a credit card and offer many of the same consumer protections when issued by a major payment processor such as Visa or MasterCard.
In addition to the standard type, there are two types of debit cards that do not require the customer to have a checking or savings account.
1. Standard debit cards-
Standard debit cards draw on your bank account. Electronic Benefits Transfer (EBT) cards are issued by state and federal agencies so that eligible customers can use their benefits to make purchases.
2- Prepaid debit cards-
Prepaid debit cards are cards that allow people without access to a bank account to make electronic purchases up to the amount pre-loaded onto the card.
Frugal consumers prefer to use debit cards because there are usually few or no fees associated with them, unless users spend more than they have in their account and incur overdraft fees.
In contrast, credit cards typically charge annual fees, over-limit fees, late payment fees and various other penalties in addition to monthly interest on the card's outstanding balance. (The no-fee benefit does not apply to prepaid debit cards, which often charge activation and usage fees in addition to other costs.)
Further, your debit card could be an offline card. Offline debit cards are not electronically linked to your account. There will be some time between making a purchase and when the funds are taken from your account.
Advantages of Using Debit Cards
Like credit cards, debit cards can also have advantages and disadvantages.
1. Avoid Debt-
A debit card uses money already in the user's account, eliminating the risk of going into debt. People typically spend more when using a plastic card than when paying with cash. By using a debit card, impulsive spenders avoid the temptation of credit and stick to their budget. This helps keep you away from high-interest debt.
2. Fraud Protections-
In the past, credit cards offered greater protection from fraud than debit cards. Some debit cards - particularly those issued by payment processors such as Visa or MasterCard - now offer protections that exceed those enjoyed by credit card users.
The key is reporting fraud or theft as soon as you realize it has occurred. Your liability for fraudulent purchases is determined by the time frame in which it’s reported. Waiting too long to let the bank know that your card has been used for unauthorized purchases could result in you being held responsible for some or all losses.
Since a debit card is directly linked to a bank account, fraudulent purchases can quickly empty the account or cause an overdraft. This cannot happen with credit cards because they are paid later.
3. No Annual Fee-
Although credit cards charge an annual fee, debit cards do not charge any fees. You do not have to pay a fee every time you withdraw cash from a bank ATM using a debit card. But you have to pay cash advance fees and hefty interest rates for availing the facility of a credit card. However, you may have to pay other fees for maintaining your checking account.
Disadvantages of Using Debit Cards
The biggest disadvantage of using a debit card is that it has no impact on your credit score and there are potential fees.
1. No Rewards-
Unless you have a rewards checking account, you can't earn any points, miles or cash back on purchases made with your debit card. Since rewards help you save money, it depends on how you redeem them, so you lose some of the benefits if you use a debit card.
2. Credit score will not be built-
Building a good credit score means showing lenders that you repay the borrowed money responsibly and on time. When you spend using a debit card, you are not able to show your credit history to lenders and banks. Therefore, you cannot build your credit history just by using a debit card.
3. Fees-
Debit cards do not have annual fees, but there are other fees you have to pay for having a checking account. These include monthly maintenance fees, overdraft fees when you spend more than your account balance, returned-item fees, and foreign ATM fees when you use your debit card at a machine at another bank or financial institution.
Are Debit Cards the Same as Credit Cards?
Debit cards and credit cards look similar and have similar features such as a 16-Digit card number, expiration date and branded Visa or MasterCard logo, but there are several differences between credit cards and debit cards. The main difference is that debit cards are linked to bank accounts and money is withdrawn directly from those accounts. Credit cards, on the other hand, may incur interest and fees if money is withdrawn at a bank
Can You Earn Rewards With a Debit Card?
No, debit cards do not earn points or miles for any purchases, the accounts they withdraw money from do so by providing cardholders with benefits in exchange for a certain number of transactions. Standard debit cards also often offer a round-up feature that allows the cardholder to transfer small amounts to a savings account, a feature not applicable in the case of credit cards.
Do All Credit Cards Charge Interest?
You may find 0% interest promotions, but all credit cards eventually charge interest on the balance that grows month after month. This interest rate is based on the annual percentage rate (APR). To avoid paying interest in the long term, pay your balance in full each month.
Can Anyone Get a Credit Card?
Most people can apply for a credit card, but those with a poor credit score cannot apply for a credit card. And we offer credit cards to those with a good credit score. Those who are eligible for a credit card with benefits are given the same by the credit card issuer. People with no credit score or a very poor credit score can apply for a secured credit card, where the credit line is secured by a deposit made at the time of opening the card. Most rewards cards require you to have a good credit score.
Is a Credit Card Safer Than a Debit Card?
Credit cards generally offer more consumer protections against fraudulent purchases than debit cards do. These fraud protections do not apply as liberally or as easily to debit card purchases.
Conclusion
Credit and debit cards may sound similar, but their benefits and disadvantages are very different. If you want to maintain your credit score and earn rewards, credit cards are a great tool for your financial journey. If you want more control over your finances, debit cards are a better option for you. Whichever you choose, make sure you know everything about the fees associated with each account so you don't run into any problems in the future.
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