What are the difference between debit card and credit card?
Debit card has been in use for a long time. I don’t think there is anyone who holds a credit card that will not have a debit card also. So, it is obvious that debit cards and credit cards are not strange to some people. But unfortunately, if you ask these people to tell you the difference between debit card and credit card, they will not be able to pinpoint any significant difference. Another category of cardholders are these who have a fair knowledge of the two cards; that is debit card and credit card. However, when it comes to usage, they are totally confused. They don’t know when it is appropriate to use either debit card or credit card. Some will just pick the card their hand touch as a means of payment for any transaction they want to make. I know you may be asking me in your mind that; is there anything wrong with that? Well, I am not here to judge. However, this article is written to clear the air about the question a lot of people usually ask. The question is: Between debit card and credit card, which one is better? To address the question, I will like you to have a fair understanding of debit card and credit card first.
Difference between debit card and credit card
When you look at both debit card and credit card, physically you may not see any much difference. The two cards are in plastic and they almost look the same. However, their difference is not essentially in their outlook but in the way they operate. Debit card is as good as your check book which allows you to withdraw or make payments from your checking account. Debit card is linked to your checking account. That means, each time you use your debit card, you are drawing money from your checking account. The debit card allows you to spend as much as you have in your account. If your bank allows you to overdraw your account; you can use your debit card to draw more than what you have in your account up to your pre-approved overdraft limits. With debit card, you don’t actually need to carry cash with you before you can make purchase. Most restaurants, petrol filling stations, supermarkets and grocery stores accept debit cards as means of payment. On the other hand, credit cards allow you to make purchase on credit just as the name implies. When you use credit card, you are simply borrowing money from your credit card issuer with the hope of repaying later either in full or in parts over a period of time. You can use your credit card to make purchase up to an approved credit limit. It is good to mention here that, even though you have the liberty of using your credit card to make purchase up to your approved credit limit, it is not advisable for you to do so. Maxing out your credit can hurt your credit score. In summary, the difference between debit card and credit card lies at the point when you actually make payment or when the money leaves your account. When you use debit card, you are spending your own money from your checking account. Whereas in the case of credit card; you are spending someone’s money with the promise to pay back later. If you make the full payment at the end of the month, you may not need to pay any interest. However, if you carry any balance at the end of month, then you will need to pay interest on the balance as at the statement date. The amount of interest you will need to pay on each transaction depends on the amount and time of the transaction and the card apr.
Debit Card Vs Credit Card. Which is better?
The question of which one is better between debit card and credit card cannot be answered the way you expect. The answer you will get is hinged on many factors. You may not get a straight forward answer. I may tell you that debit card is better for you while I tell another person that credit card is better. Also, I can say that it is better to use a debit card today while I tell you to use credit card tomorrow. Does it sound confusing? I will advise that you don’t rush for the answer. Before I go to the answer, let me explain with this analogy. May be, it will help you to understand the subject better before I even give my answer. Let’s assume that you have two vehicles; a car and a bus. The two vehicles are new and in good state. You intend to travel. Someone now asks you that which of the vehicles is better to travel with. Before you give any definite answer, you may likely consider the purpose of the trip and how many people will be going with you. How long are you going to stay and what you need to carry along with you? By the time you do all the analysis, you may conclude that it is better to travel with the bus. The question now is; has that make the bus to be better than the car? In another time, if you alone are going to the office, you may prefer to go with your car. I hope you can see how situations or circumstances determine which vehicle to choose per time. In the same vein, if you want to answer the question of which card is better between debit card and credit card, you may need to consider many factors. The factors to be considered include the following:
In all standard, it is easier to apply for a debit card than a credit card. In fact, most banks encourage their customers to apply for a debit card as long as you have an account with them. The application process is quite simple and quick. You can even get a debit card even though you have a bad credit. Unlike when you apply for a credit card where investigation has to be conducted about your credit ratings. Every of such investigations constitutes a hard inquiry which can impact on your credit score. So, if your credit is bad or you don’t want to go through the credit card application process, you may stick to using debit card.
If you are liquid and have enough cash in your current account, you may have the option to choose whether to use debit card or credit card. However, if you don’t have cash to pay for the transaction you want to make, you may be tied to your credit card. Credit card allows you to buy on credit while you pay later. With credit card, you can use someone else’s (card issuer’s) money to pay for the transaction now while you pay the lender later. It does not mean that you must always use your debit card because you have cash in your checking account. It only gives you the opportunity to make your choice. By the time you weigh the option, you may still decide to use credit card even though you have cash to pay.
If you want to make a large purchase that will require that you pay a very substantial high amount, you make resolve to using your credit card for two reasons. First, you may not have enough amount in your checking account to make the outright purchase. Second, some banks put a cap on the maximum amount you can spend per day using a debit card as part of security measures to protect their customers. So, if the amount of what you want to buy is above this maximum amount, you may not be able to use your debit card for such a transaction. However, if you don’t have a credit card, you can use your check as a means of payment.
In this era of credit economy, the importance of having credit history cannot be over-emphasised. Without having good credit history, you may find it difficult to obtain loans, be it personal loan, auto loan or mortgage loan. Lenders like to see your credit history so that they can determine whether you are credit worthy or not. Ordinarily, you may be a credit worthy person but there is no way you can prove it to potential lenders if you don’t have credit history. And the only way to build credit history is to have credit. That is why you will see people who have enough money to buy things in cash still using their credit card to make purchase. Your credit card issuer normally reports the transactions you make with your credit card to the consumer credit reporting agencies. On the other hand, your bank doesn’t report the transactions you make with your debit card to the consumer credit reporting agencies. So, it doesn’t matter how long you have been using a debit card, if you don’t have and use a credit card, you will not have credit history. Therefore, if you aim at building your credit history, it may be good for you to use your credit card to make purchase and ensure that you pay the card balance in full at the month end. This will make you avoid payment of interest. You need to make the payment on time as late payment will attract fee. Late payments can also hurt your credit score.
Interest payment and operating fee
If you use debit card to make payments, you don’t pay any interest on the purchase you make. The reason is that, you are spending the money you have in your checking account. Notwithstanding, if you happen to overdraw your account, then, interest will accrue and you will need to pay. Therefore, if your motive for using a debit card is to avoid interest, you must ensure you don’t spend more than what you have in your account. You can devise a means of checking your account balance before making any transaction. Some people choose not to use credit card because they want to avoid interest payment completely. If your sole reason for not using a credit card is to avoid interest charges, that may not be enough justification. You need to understand that it is not automatic that you must pay interest on your purchase if you pay with your credit card. If you don’t carry any balance on your credit card at the end of the month, you will not need to pay interest. In another word, if you pay off your card balance at the end of the month, no interest will accrue on your card. In term of operating fee, your bank may only charge you annual nominal fee as annual debit card maintenance fee. In the case of credit cards, annual fee may be higher. Also, other fees such as late payment fee and over the credit limit fee may apply.
One of the benefits of using credit cards is the rewards that some of them offer customers. If you hold reward card, you can enjoy cash back, travel mileage points and special discounts on purchases. So, if you want to enjoy such rewards, it may be preferable to use credit cards that offer their customers such rewards. At the same time, you need to be conscious about the terms and conditions that attach to the offers. Also, you should not be driven away by any reward. if you buy things you are not able to pay back at the end of the month, you may lose the bonus or realise that the interest you will pay outweighs the bonus you are chasing. The annual percentage rates (apr) of reward cards are usually higher than that of the regular credit cards. The rule of the game is that; don’t buy beyond what you have the ability to pay. The secret of the so called reward cards is that, they know that some customers will be greedy about the rewards. They will buy things they may not be able to pay at the end of the month in order to qualify for the rewards. Before you know it, they end up in debt and they will start and continue paying interest on the debt until they fully pay it off. We all know how difficult it is to pay off debt. So, what the credit card companies do is to use part of their interest income to pay the few customers that may qualify for the rewards. If you use a debit card, you may not qualify for any cash back or reward points. At least, you will not enter into temptation of buying beyond what you have the money to pay.
Read Also: What to know about reward credit cards
Returns and refunds
If you want to make a purchase online and the goods have to be delivered to you at home, you may not have the opportunity to actually assess the quality of such items. If you use your debit card to make the payment, the money leaves your account almost immediately. But in the case of credit card, you are not directly paying for the item until the end of the month. What happens if the items is defective or of sub –standard quality? Definitely, you will like to return the item and have your money refunded to you. It is true that some supermarkets or stores have refunds policy. It can be difficult processing refunds at times. Some of them may not refund cash to you. They may give you store credit or give you another item in exchange for what you returned. But if you use credit card, credit card companies usually offer additional warranty in case of any needs for refunds. So, if you want to buy something you are not sure of the quality or you don’t have the opportunity to assess before you make payment, it may be better to use credit card instead of debit card
Protection and Security
When it comes to protection against fraud, credit cards offer better security than what debit cards offer. If your credit card gets stolen or you are victim of frauds, the highest amount you can lose is $50. But in case of debit card, you can lose everything in your account. Nevertheless, if you report the loss of your debit card within 48 hours, the highest amount you can lose is $50. If you make the report within sixty days, you can lose as much as $500. In case you fail to make the report within sixty days, you can lose all the money you have in your checking amount. So, if you know that your cards are not that secure due to your environment or you desire better protection on your fund, it may be better to carry credit card instead of debit card.
Another critical factor that may determine whether you will use a debit card or credit card is the nature and location of the transaction you want to make. Some organisations such as hotels and rental companies may prefer that you use credit card as means of payment. If you rent a car, the car rental agency may expect that you leave a certain litres of fuel in the tank when returning their car. Also, if you stay in a hotel, there is tendency that you will incur other expenses such as charges for laundry and special room services. So, apart from the deposit you made, such organizations want to be sure that you will be able to pay additional expenses you might incur. In such situation, debit card may not be appropriate to use.
Even though we operate in a cashless economy, you still discover that there are instances where you need to make cash payment. This may necessitate that you use your card to make cash withdrawal from the ATM. If you want to make cash withdrawal, it is better to use your debit card. If you use credit card to withdraw cash from the ATM, your card issuer will recognise the transaction as cash advance. Therefore, you will be charged a fee in addition to the interest you will have to pay on the amount withdrawn. To worsen the case, the interest will start to accrue immediately. That is why it is better to withdraw cash with debit card if you need to do so. However, if you find yourself in a situation where you don’t have your debit card with you or you don’t have enough money in your checking account, you may be left with no option other than to use your credit card to make the withdrawal. If that is the case, you should ensure that you pay off the amount as soon as possible so that you don’t have to pay excessive interest.
If you are the type that doesn’t like owing or you want to avoid debt by all means, you may as well avoid credit card. Also, credit cards are not for people who cannot control their spending. If you are an impulse buyer, you may soon find yourself in deep debt if you hold credit card. It may be better for you to stick to your debit card. But it is important you remember the point I mentioned earlier that you need credit to build your credit history. You cannot build credit with your debit card. Credit history is one of the factors the customer credit bureau agencies consider in determining your credit score. In fact, your credit history accounts for 30% of the parameters used in calculating your credit score. You can imagine how your credit score will look like if you are losing out completely in this area. Besides, good credit score can help you get more favourable car insurance premium.
In conclusion, it is beneficial to hold both debit card and credit card. This will give you an option anytime you are in a position to choose between cash or credit purchase. If not for anything, you need credit card to build your credit history. Therefore, it may not be good enough to limit yourself to debit card.