Debit Cards vs Credit Cards

Credit Card vs Debit Card

Although credit/debit cards both have 16-digit card numbers, expiration dates, and PIN codes they offer very different services that are important to understand in order to keep your personal finances healthy. There are a variety of pros/cons to consider when deciding whether to make a purchase on a debit or credit card and having an understanding of the different incentives/consequences of using each card will allow you to make more informed decisions regarding your day-to-day payment methods.

What is a Debit Card?

When you purchase something with your debit card, it takes funds directly from your checking account. When you are using your debit card you are never using borrowed funds; every transaction requires you to have sufficient funds before you are approved to make the purchase. Debit cards are great to use to ensure you are not spending more than you can afford!

There is something called an ‘overdraft’ which does allow you to make purchases even without sufficient funds in your account. To use an overdraft service, you will have to pay a fee of ~$35.

There are also prepaid debit cards that only let you spend money that has been loaded onto a card. Prepaid cards can be a good alternative to those who don’t have access to a bank account, and they also don’t require a credit check which may be useful for some customers.

What is a Credit Card?

A credit card also allows customers to purchase products without the need to carry cash or a checkbook. However, credit cards don’t just use capital that you have deposited in your bank account – they also allow you to use borrowed funds. There is usually an agreed-upon borrowing limit set by the issuer which is determined by the credit-score of the individual.

Using a credit card means that you can borrow up to an agreed upon amount of money from the bank, under the agreement that you will repay borrowed funds before a specified due date. If you are unable to repay the funds by the due date, you will incur interest charges which can be very high.

In addition to the increased flexibility when spending that a credit card allows you, you can also establish a credit score that will assist you in securing loans or a mortgage. Credit cards also often come with monetary perks such as interest free periods or travel benefits. Finally, credit cards offer better fraud protection than debit cards which means that if your card is stolen and purchases are made, you will be protected far more than if your debit card was stolen.

Conclusion:

In order to most effectively spend your money and you must be able to make informed decisions on what accounts should be paying for your different purchases. There will certainly be time that a credit card comes in handy and another time which is better suited to be paid via your debit card, and making those decisions comes from having a good understanding of the functions of each.

When deciding on what card to use for a purchase, factors such as the size of the transaction, your ability to handle credit, and potential rewards if you use a credit card should all be considered.