When it comes to debit and credit cards, they basically look identical. How different can two pieces of plastic look? Both have numbers, names, and dates on them, and both are used for shopping online and in-store. The truth is that there is no outward difference – the main difference between debit and credit cards is how they handle money. While debit cards use your money, credit cards utilize your line of credit. All of this can sound confusing, especially when you’re new to banking or using plastic money.
Credit cards and debit cards may look alike, but this is deceiving. In this article, you’ll find out how they differ and when to use each card.
However, you don’t have to worry. This simple guide is a complete breakdown of the two types of cards, including what they are, how they differ, their advantages and disadvantages, and when using each card is optimal. Read on to learn more about these standard cashless options.
1. What Are Debit Cards?
Debit cards are basically like cheques but in the shape of plastic cards. They’re linked to your bank account and use your money when you’re purchasing items or services. If you’re trying to buy a $600 monitor and your bank balance is $550, you can’t make the payment. You may even get charged an overdraft fee for trying to spend more than what you have.
Since they’re linked to your bank account, you won’t receive a bill for each transaction and won’t have to pay interest. If you need cash, you can use your debit card at an ATM, enter your personal identification number (PIN), and withdraw the required amount.
1.1. Advantages of Using a Debit Card
1.1.1. No Debt
Because a debit card only allows you to spend what you already have, there’s no risk of racking up debt.
1.1.2. Fraud Protection
1.1.3. Lack of Fees
Not only do debit cards not have an annual fee, but they also don’t have late fees because there’s no borrowing involved.
1.1.4. Cash Availability
Debit card users can have access to cash at any time, given they’re near an ATM.
1.2. Disadvantages of Using a Debit Card
1.2.1. Lack of Rewards
While some specific debit cards offer rewards, many don’t. Credit cards can be used to rack up airline miles or points, but this opportunity isn’t given to debit card users.
1.2.2. Lack of Flexibility
In case of emergencies, you cannot borrow additional money. If your account doesn’t have enough money, you’re restricted in terms of what you can purchase. Additionally, some places don’t accept debit cards, which limits your options.
1.2.3. No Building Credit
While you may spend responsibility, you can’t show this to lenders. This doesn’t give you the chance to build a credit history as a credit card does.
While these are less than those you pay on credit cards, there are some fees that you may incur. Overdraft fees are a great example of this and occur when you try to make a purchase exceeding the amount of money in your account.
2. What Are Credit Cards?
Like debit cards, credit cards are plastic cards you can use to make purchases. However, unlike debit cards, they don’t use your money to make purchases. Instead, using a credit card is similar to taking a loan from the bank. You spend money from your line of credit and then pay back this money at the end of the month.
These cards also have a limit on the amount of money you can spend. However, this depends on your credit limit, which varies from person to person. Not paying the bank back in time also results in you paying interest and late fees. Popular credit cards include those offered by card companies like Visa, Mastercard, and American Express.
2.1. Advantages of Using a Credit Card
2.1.1. Building Credit History
One major advantage is the ability to build a credit history. All your credit card use, payments, late fees, and more are recorded and put in your credit report. This determines your credit score and allows those with positive credit histories to increase their credit limit.
Credit cards often have great reward programs that can actually help you earn back some of the money you have spent. You’re rewarded for purchases you’re already making.
If you’re not carrying enough cash, you can always use your credit card instead. You’re not limited to the amount of money you already have since you can spend from your credit limit. Additionally, some places don’t allow the use of debit cards – this isn’t a problem with credit cards.
2.1.4. Fraud Protection
If you’re a victim of fraud or identity theft, you’re protected. While credit cards provide some protection, this is much greater with credit cards.
2.1.5. Additional Benefits
Some credit cards also offer benefits like extended warranties when you buy electronics using them.
2.2. Disadvantages of Using a Credit Card
2.2.1. Poor Credit History
Just as a positive credit history can help, poor credit history can hurt you in the long run.
2.2.2. Interest and Late Fees
Not paying back on time leads to interest and late fees, which wastes more money. Additionally, some credit cards charge extra fees that you may not know of. These hidden fees can lead to you losing money without even realizing it.
Because you’re not spending your own money, credit cards can tempt you to spend more than you can afford to. Consistent overspending can lead to a mountain of debt, which is worsened by interest and late fees. Only a minimum payment has to be made, which makes some people complacent and encourages them to spend more.
3. Using Debit Cards and Credit Cards
Now that you’re familiar with debit and credit cards and their advantages and disadvantages, you can learn when to use each option. A lot of this depends on your spending habits. Are you an impulsive buyer and spend more money than you should? You should stay far away from credit cards. However, if you’re responsible with money and want to build a credit history, using a credit card is for you. Consider your income and debt when deciding which card to apply for or use.
The purchases you’re planning to make also affect this decision. Places like hotels or rental agencies sometimes only accept credit cards. If you’re a frequent traveler, and will come across this often, you may want to use a credit card instead of a debit card.
Sometimes, when you’re a tight budget, you may use your debit card to ensure you don’t spend money you don’t have. At other times, you may not have enough to pay for an expensive item at the moment but will come into the money soon. Credit cards are great for short-term loans you can then pay back when you’re able to. In essence, the use of different cards depends on your unique situation – hopefully, this guide has been informative enough to teach you which card to use at the moment.
If you’ve been using this website to make money online, you now know how to spend it. We hope this article has been helpful, taught you how debit cards and credit cards work, and which option to apply for and use.