Credit Card Vs. Debit Card: Differences, Similarities, and How they work

On the surface level, both cards may appear similar. However, in terms of purpose and function, both cards have their unique uses. If you are still confused about the two cards, this credit card vs. debit card article will provide you with all the answers you need.

While both credit cards and debit cards aim to help you reduce the amount of cash you carry around, both cards work in different ways. However, the good news is that most merchants accept both cards as a mode of transaction.

In a nutshell, debit cards get funds directly from your bank account, while credit cards draw funds from a line of credit, which the credit card company bills you later.

The main difference between both cards is, therefore, where they pull their funding. To vividly understand the difference between debit cards and credit cards, it is essential to understand the definition of the two cards.

What is a Credit Card?

A credit card is a card that allows you to make purchases and borrow funds for payment against a line of credit (card’s credit limit) provided by a financial institution.

When you make purchases with your credit card, the amount is reflected on your bill while your bank pays your merchant. In return, the bank sends your bills later, which may include interest.

You then pay the bank within 30 days. It is vital to pay off your monthly bills within 30 days when using a credit card to avoid high-interest rates. The easiest way to incur huge interest rates is by carrying over the balance from the previous month to a new month.

Credit cards work with a credit score. A credit score is a summary of your credit card payment history and balance. Timely payment will help to improve your credit scores and save you from paying high-interest rates.

Note that, Credit cards have high-interest rates, and it is best to use them only when necessary.

Essential Facts You Should Know About Credit Cards

  • The bank uses your credit score to decide your credit limit.
  • Your purchase will attract interest if not paid off within 30 days.
  • When using a credit card, you no longer need to sign for in-person credit card purchases.
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Read: How to Activate Your Chase Debit Card

What is a Debit Card?

Just like a credit card, debit cards make it convenient to make payments for goods and services. However, as earlier mentioned, the funds are pulled directly from your account.

In this case, the bank places a hold on the number of purchases. In return, the merchant forwards the transaction to the bank, and the bank pays the merchant.

The process can take a few days, and the hold may drop off before the conclusion of the transaction.

Note that: it is essential to have a running balance of your checking account to ensure you do not overdraw your account by accident.

To use your debit cards at ATMs and stores, you are required to create a PIN. However, some merchants will not require you to provide a PIN to make payments. With a debit card, you will also need to sign the receipt like using a credit card.

Essential Facts You Should Know About Debit Cards

  • Using a debit card for purchases does not attract any interest.
  • Debit card spending does not affect your credit history.
  • Paying with a debit card draws the money from your account almost instantly.

Read: 15 Best Ways to Send Money to Debit Card

Debit Cards Vs. Credit Cards

It is hard to overspend with a debit card since your spending is limited to the available amount in your checking account.

On the other hand, a credit card puts you at a higher risk of spending above your means. Even though your credit limit maybe $1,000 per month, that does not mean you can afford that amount in a month.

Debit cards offer the same convenience as credit cards. You are not required to borrow money or pay any interest on purchases. However, if you want to have better control of your money and live within your means, a debit card is your best choice.

While debit cards are good for managing your funds, some credit cards offer additional insurance that makes it easier for users to request a refund. However, in recent times, many credit card companies are, removing these benefits.

Therefore, it is essential to read the disclosure information carefully to understand what you stand to benefit from a credit card company.

In an emergency spending situation, a credit card can be a lifesaver. The need for spending might show its head even before your monthly check arrives. You can make payment with your credit card while you wait for your monthly paycheck to arrive.

A credit card allows you a period of up to 30 days before your payment is due. Remember that if you fail to repay your balance in time, emergency spending is one way to run into huge debts.

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Read: How To Use A Credit Card To Build A Credit In 2022

Benefits of Using a Debit Card

  • Naturally, banks are less concerned about your previous credit score. Since a debit card draws funds from your account when you purchase, the bank may not care much about poor credit scores. Therefore, obtaining a debit card is much easier.
  • Again, the benefit of cash coming directly from your account means that you will not incur huge debts. Without sufficient funds in your account, your debit card will not work. Note that if there is overdraft protection on your account, it will attract some fees. Therefore, it is essential to know the details of your account.
  • A debit card is an inexpensive option for both you and the merchants. Merchants pay low fees. In most cases, you may not have to pay any extra charges on your debit card.

Benefits of Using a Credit Card

  • Credit cards enable you to build credit and improve your credit score over time. As long as you pay up your payment every month, you will gain a good score and increase your eligibility.
  • Credit cards offer exceptional fraud protection services. In case of theft or loss of credit cards, you have enough time to dispute charges since credit cards come with grace periods. Many credit cards also have warranties that protect the owner against theft issues.
  • Many credit cards attract rewards for using them. Some popular ones are travel and cashback rewards as long as you ensure you clear your bills on time.

Read: What Is A Virtual Debit Or Credit Card

What Card to Choose for Different Situations

Before you decide what card to use, be honest with yourself about your ability to handle credits. If you have a history of dealing with spending issues, it is best to stick to a debit card as much as possible. Falling into credit card debt can be a costly mistake.

Also, consider the type of purchase when choosing a card. Many rental car services and some hotels make it very uncomfortable for customers to use debit cards. They may request a long list of documents before they can allow you to use your debit card. In such situations, a credit card can be your best option.

If you also wish to take advantage of various reward programs, you might consider a credit card. However, note that this system will only favor you when you pay off your balance in full every month.

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Note that: while you may save in rewards while using a credit card, carrying over your previous month’s balance into a new month can cost you a large sum on interest. In order words, you end up paying much more than the reward you earn.

If you aim to build a great credit score, you should consider using your credit card occasionally. The best way to develop credit-worthy and responsible behavior is by making charges and paying off your balance as early as possible. It creates a good impression of you before the credit bureau and reflects on your credit score.

Nonetheless, it is essential to understand that your credit score can determine whether you are eligible for a credit card or not. For those with no credit history, it is best to use a credit card to build a strong profile. One of the key reasons why people prefer to use a debit card is money management. While the bank keeps a record of all transactions, keeping a log of your expenditures will ensure that you do not find yourself struggling with insufficient funds at the checkout line.

In a nutshell, it is essential to consider the following factors before deciding what card is best for you:

  • Do you wish to stay clear of debts?
  • Are you trying to avoid endless monthly payments?
  • Are there any reward or cash back programs that interest you?
  • How solid is your credit history?
  • Are you planning to purchase a car or a house in the future?
  • Are you more concerned about managing your spending?

Answering these questions with all sincerity will help you decide what card will work best for you.

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Frequently Asked Questions About Credit Cards Vs. Debit Cards

Is there any difference between a debit card and a credit card?

While a debit card and a credit may look similar in design, the debit card will carry a debit written on the front of the card.

Are there situations where a specific card is better than the other?

Yes. Certain companies like hotels and car rentals work best with credit cards.

Is it compulsory to create a pin for my debit card?

To withdraw at an ATM, your bank requires that you create a PIN. However, some merchants will not require a pin for you to carry out transactions with your debit card.



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