Know The Difference Between Debit Vs Credit Cards

Debit vs credit cards are some of the most essential financial tools people now have. These cards were the very first step towards a more cashless financial system. So, naturally, you must have heard about debit and credit cards. But do you know the difference between credit card and debit card? 

Understanding the difference between debit vs credit cards is an important part of better financial planning. Let’s examine the core differences and how they affect the user. 

What’s a Debit Card?

If you prefer a more budgeted approach to your finances and are willing to work with your funds with a cap, debit cards are a far better option for you when comparing debit vs credit cards. With a debit card that is linked to your checking account, accessing your funds becomes much easier. The card can be used to pay the vendors directly or withdraw money without going through the hassles of paperwork like in the old days. 

Debit cards can be used anywhere there is a card-reading machine or an ATM. They can also be used for online purchases. While the older designs of debit cards allowed the user to pay with a swipe, advancements have improved this, letting you pay by just tapping the card. You can also get a digital version of the debit card to avoid carrying it around. 

There are also prepaid debit cards that are not linked to any accounts. Like a forex or travel card, these cards must be loaded with money before you can use them. 

Pros and Cons of a Debit Card

What’s a Credit Card?

A credit card looks exactly like a debit card, but that’s all they have in common. Credit cards are used primarily for payments during online purchases and other regular transactions but rarely for cash withdrawals. You can also withdraw cash with a credit card, which is referred to as a ‘cash advance’, but most people prefer having a debit card for ATM transactions. 

Unlike a debit card issued with a bank account, one has to apply and qualify for a credit card. Credit cards have specific limits assigned to them that are decided by the provider based on the applicant's credit history.

When you use a credit card, the credit piles up as a debt that must be paid fully, along with an interest at the end of every month. Since credit card interest is the main source of revenue for credit card companies, credit card debts are known to have interest rates that are too high. Let’s now find out the difference between debit vs credit cards!

Pros and Cons of a Credit Card

The Basic Difference Between Credit Card and Debit Card

To understand which card is better for you, especially as a student, it is important to understand the basic differences between debit vs credit cards. Let’s take a look at the differences:

1. Funds

Debit cards are issued along with bank accounts. Thus, naturally, with a debit card that is linked to your account, you are essentially spending your funds. Every time you use the card to make a payment or a purchase, your bank transacts the amount to the recipient's account. 

On the other hand, the funds you are spending with a credit card are not yours. Your credit card company typically owns your credit card funds, and during your purchase, you are basically just borrowing money from your card provider. This borrowed money must be paid back to the provider before the due date, on which they will usually charge an interest. Thus, the fund ownership is one of the biggest differences between debit and credit cards. 

2. Expenditure Limits 

Since debit cards are a way to access your money more conveniently, your spending limit is obviously whatever amount is in your bank account. While regular bank accounts may have a minimum balance decided for the account below, you cannot spend with a 0 balance student account, even if that limitation is eradicated. 

However, while comparing debit vs credit cards, it is important to know that credit cards come with a pre-set limit. The card issuer or provider decides the limit based on the user’s credit scores and debt history. Spending over the limit of your credit card can result in a credit card decline, or you may have to pay some extra fees for additional transactions. 

3. Interest 

Comparing debit vs credit cards, while using a debit card, you don’t have to worry about paying any interest. Since it is your own money that you are spending, there is no built-up debt and interest to be paid. 

On the contrary, using a credit card requires a little more responsibility since every purchase is like a small debt since you borrow money from your credit card company. A significant fact about credit card debts is the fact that they have high interest rates, so it is advisable to be more mindful of your spending habits while using a credit card. 

4. Monthly Statement 

You will receive a monthly statement as a user for both debit vs credit cards. But there is a huge difference between credit card and debit card monthly statements. In the case of a debit card, the monthly statement will only include the list of expenses and transactions. 

This helps the monthly user track exactly where they are spending as they are provided with their monthly expenditure history. However, things are different with a credit card monthly statement. The statement provides information about your outstanding balance, interest amount, due date, and expenditure history.

5. Building Credit 

So, how do using debit vs credit cards affect your credit score? Using a debit card does not change your credit scores at all. As you spend your money from your bank account, your overall credit scores have no increase or decrease. Since credit scores are affected by debts, using a credit card significantly affects your credit scores. 

Paying your credit card debts late or missing out on the minimum payments can negatively impact your credit scores since it is also a type of debt. On the other hand, making your payments on time can help you build your credit history and thus avail many other benefits like student loans and unsecured personal loans.

When May It Be Better to Use a Credit Card?

1. Credit cards offer benefits over debit cards when managing debt without interest charges.
2. For significant purchases, credit cards provide enhanced protection under Section 75 of the Consumer Credit Act.
3. Some travel providers only accept credit cards for reservations, with potential added protection through Section 75.
4. With specific credit cards, you can earn rewards like cashback or frequent flyer points and accumulate points for shopping vouchers, flights, or fuel discounts, ensuring you clear your balance monthly.
5. Regular use and full payment of a credit card can improve your credit score, showcasing responsible debt management to lenders for future loans or mortgages.

When May It Be Better to Use a Debit Card?

1. You can use a debit card for cash withdrawals, as it's usually free in some countries. Using a credit card for this can incur fees and immediate interest charges.
2. You can easily monitor spending with online and mobile banking for debit and credit cards, as well as monthly statements.
3. Limiting day-to-day spending to a debit card can help avoid accumulating significant credit card debt.
4. Solely using a credit card for expenses may lead to unnoticed debt accumulation, especially for those prone to overspending.

When Is It Better to Use a Debit Card Than a Credit Card?

Choosing when to use a debit vs credit card can be strategic for managing your finances. A debit card is ideal for small daily expenses, such as coffee or groceries, and for those already burdened with significant debt. Additionally, using a debit card makes it easier to keep track of your spending, providing a clearer picture of your financial habits.

Other Key Differences Between Debit Cards and Credit Cards

Even though debit and credit cards are valuable financial tools, they do have some key differences between them. Let’s take a look at the top three differences of debit cards vs credit cards:

1. Rewards

With credit cards, you can enjoy the luxury of earning points for your spending and claiming them as rewards. These points can then be used to book cheap flights, get cashback, get discounts, and so on.

2. Freedom

So, when it comes to the liberty of making a purchase when you want it credit cards are going to be your preferred choice, but that’s not so much the case with debit cards because them being a just medium to extract your bank account.

3. Fraud 

Okay, in case of fraud, with credit cards, you need to pay around $50 max as fraudulent charges, but in the case of debit cards, you can lose the entire money that you’ve got inside your bank account.

So, by better understanding the nuances of debit vs credit cards, you are setting yourself up to make the most of the discussion of debit cards vs credit cards.

Both debit and credit cards are essential tools of financial management. While a debit card is your key to having a more accessible bank account, a credit card can be a lifesaver during an emergency and build credit. Thus, in conclusion, it seems you need not worry about the difference between credit cards and debit cards or the marketing of debit vs credit cards.