The Differences between Credit Card and Debit Card Explained
Many people often use the term credit card and debit card interchangeably, but they are two different items. In fact, most people refer to both of them as a credit card. However, some people are aware that they are different, but can’t list the differences. This article discusses the differences between the two so that you can choose one over the other.
Now that you are aware that a credit card is different from a debit card, you might be asking yourself which is better? To put it straight, neither is better than the other. Both of them have their pros and cons, and they’ll be discussed here. Nevertheless, one of them may suit you more than the other, depending on your lifestyle and spending habits.
Where the money is drawn from?
A debit card is tied to your bank account. When you purchase any product or service with your debit card, the money is drawn from your account immediately. The big disadvantage is that you can’t spend more than the money in your account with a debit card.
For instance, if you have $250 in your account and you want to place an order of $300, the order is more likely to decline. Also, it has a flip side. With a debit card, you can’t incur any debt. You can only spend what you have earned. This is why impulse spenders should consider a debit card.
On the other hand, a credit card comes with a spending limit because it is not tied to your money, but to your issuer’s money. When you pay with your credit card, you’re actually taking a loan from your issuer, which you must pay back at the end of the month to avoid paying any interest.
The advantage of a credit card is that it allows you to spend more than you have. The other part is that you could run into a huge debt if you don’t use a credit card responsibly.
Safety of your money
If your debit card is stolen and used for a financial transaction, it’s your money that is being spent. You may eventually get your money back when you report to your bank, but it could take weeks or even months. This is a problem because while your bank is working on the case, you may miss out on important payments or borrow to pay.
When your credit card is stolen and used, the money being spent is your issuer’s money, not yours. If you report it before it is used, you won’t be charged for any unauthorized transactions. That means the theft of your credit card may not affect you or your finances if you act fast.
Building a credit history
When you use a credit card and you pay your bills in full at the end of the month, it helps to build your credit history. Your credit score will keep increasing. Unfortunately, spending with your debit card does not have any effect on your credit score.
Did you just say why does it matter? When you need a car loan, a mortgage for a home, or a cell phone plan, a high credit score will make it easier for you to get them.
Earning rewards
You can earn cash backs, loyalty points, and other forms of rewards when you use your credit card. Rewards aren’t attached to your debit card payments.
Interest-free loan
When you make use of your credit card, and you pay your bill in full at the end of your billing cycle, you won’t incur any interest. The implication is that a credit card gives you automatic access to interest-free loans. This is not applicable to a debit card.
Conclusively, both credit cards and debit cards have their benefits, but the former seems to be a better choice. Nevertheless, if you find it difficult to live within your means, you should stick with a debit card. After all, having no credit history is better than a credit history with a low score.
Here is a quick video which explains the difference between credit card vs. debit card.