You can hardly note the difference between a debit and a credit card when you take a physical look at them as their appearance is the same. Both have 16-digit card numbers, Personal
Identification Numbers, expiry dates, and you will find a logo of a leading credit card company, for example, Mastercard or Visa.
However, there are very few similarities past the physical appearance of the cards. The main difference between a debit card and a credit card is the source of financing.
A debit card will use funds you have in your checking account while a credit card obtains funds from a line of credit that the card issuer allocates to you.
Differences between debit and credit cards come in handy when it comes to deciding which card to use. The distinguishing factors bring out the benefits and downsides of using each card, which will help you make sound personal finance decisions.
Different Customers Will Prefer a Different Card. Which One Is Right for You?
Difference Between Credit and Debit Cards
How Each Card Works
You will need to understand how each card works to help you point how debit cards and credit cards are different.
A debit card is a transaction card that a bank issues for your checking account or savings account. It lets you make purchases without the need to withdraw the funds first or having to use your checkbook. Your purchases are limited to the amount in your bank account.
How You Can Acquire a Debit Card
Most banking institutions issue Debit cards automatically when you open a checking account. You may have to request a debit card if the institution does not release it automatically.
The bank will also issue a Personal Identification Number (PIN) to act as a security lock for accessing your funds.
You can change the PIN to a number you can easily remember. It would be best if you committed the PIN to memory as opposed to writing it down for security purposes.
Types of Debit Cards
There are three significant types of debit cards. Two of these cards do not require your savings or checking account.
1. Standard Debit card
A standard debit card links your expenditure to a checking or savings account.
2. Prepaid Debit Cards
A prepaid debit card has no link to any of your bank accounts. You will need to buy one and make deposits on the card. The deposits can be in the form of cash, online transfer, or checks. You can quickly get a prepaid debit card without a credit check.
Furthermore, your expenditure is limited only to the amount on your card.
3. EMV Debit Card
Europay, Mastercard, and Visa developed the EMV Debit Card. The three institutions used their names to come up with the initials of the debit card. They embedded the card with a computer chip for extra security.
Unlike the traditional magnetic stripes of other cards, the computer chips are a lot harder to copy. As a result, the EMV card is much less prone to fraud. If you wish to use the EMV, you will insert it into a card reader rather than swipe it.
Operating with a Debit Card
When you make a purchase using a debit card, your checking or savings account will place a hold on the purchase amount. You will need to sign or use your PIN to authorize the payment.
The merchant will then invoice your bank with the transaction amount for payment. More purchases will result in more holds on your funds. Once the holds exceed the amount in your bank account, it will either result in a transaction decline or an overdraft.
An overdraft is a situation where you use more money than your checking account has. What happens in an overdraft depends on the amount in your account, your card and the instructions you issued when you opened the account.
Either of the following things could happen:
- The merchant declines your transaction, and the bank doesn’t charge any fees.
- The bank declines to authorize your transaction and charges a non-sufficient funds fee (NSF). These fees range between $27 to $ 35 per declined transaction.
- The bank approves your transaction and charges an overdraft fee. For every overdraft transaction, the institution charges overdraft fees ranging between $25 to $40.
- Your transaction is approved, and the bank draws the funds from your linked savings account. Transaction fees are lower than any of the other charges as they range between $5-$10.
Paying Your Bills With a Debit Card
You need to ensure you have enough in your account to cater for recurring bills such as utility bills. There is no need to set up autopay or use checks to pay your bills as the money is coming from your account.
General Debit Card Fees
- Monthly Fees. Some institutions charge a monthly fee to maintain your debit card checking account.
- Overdraft Fees. Overdraft fees could generally cost you from $25 to more than $40. It would be cheaper to link your checking account to your savings account. The charges would range between $5-$10.
- Out Of Network Fees. You can withdraw money from any ATM using your debit card. The ATM could belong to another bank, and it would be possible to access your funds. However, you will incur conversion costs. The conversion rates range between 1% to 3% of the withdrawal or purchase amount.
- Foreign Transactions Fees. These fees when you make international purchases. They are usually currency conversion fees, and they range between 1% to 3%.
- The Credit Card. A credit card is a card that offers a certain amount that you borrow to conduct transactions. The total amount you can borrow is your credit card limit. A banking institution finances your credit amount.
You will need to make monthly payments and pay interest on the credit balance. The credit balance is the amount you owe to your credit limit. The interest will accumulate if you carry over your credit balance to the next month.
How You Acquire a Credit Card
Credit unions, banks, and other card issuers issue out credit card applications which you need to fill out for consideration. They may approve your request instantly, or they could take a few days to get back to you.
The institutions use your credit score and report are used to determine your creditworthiness. There is a chance the institution may reject your application. You could apply for a credit card reconsideration.
As you apply for and acquire your credit card, there is vital information you need to consider. Such information includes your credit limit, the annual interest rate, interest rate on balance transfers, and other credit card fees.
Types of Credit Cards
There Are Two Main Types of Credit Cards:
Secured are credit cards that will need you to pay a security deposit upfront before you can access your credit amount. The deposit will act as your credit card limit. Banks and credit card institutions will use the deposit as collateral in case you miss a payment.
If you have a poor credit score or history, you will need a secured credit card to build your creditworthiness.
People with a good or high credit score usually use unsecured credit cards. You do not need to make an upfront deposit to use a credit card. Furthermore, the terms on unsecured credit cards are usually better than those of secured credit cards.
Your credit card limit for unsecured cards will depend on your credit score, income, among other factors.
Operating With a Credit Card
You could either insert, swipe, or tap to use your credit card. The purchases you make with your credit card need approval through your signature. Small purchases and gas purchases may be an exception.
All the purchases you make, whether online or at the store, are deducted from your limit and added as your credit card balance. Your credit score could be affected negatively if your expenditure gets too close to your credit limit.
Make regular payments if your credit balance gets close enough to your credit limit.
Your Credit Card Bills
When a billing cycle ends, your card issuer will mail you a statement that shows your credit card statement balance, account balance, each transaction you made within the month, minimum payment due, and when it is due.
If you fail to make the minimum payment, the credit card issuer will charge interest on the amount, and it is carried over to the next month. Should you keep this up, the interests will accrue into a huge bill.
The interest charges are avoidable if you ensure you clear your full balance every month. Some cards offer a grace period where they do not charge interest. The grace period is usually for new users.
It starts at the end of your billing cycle and lasts up to when your bill is due. The period is often 21 days long.
Main Credit Card Fees
1. Annual Fee
The annual fee is a charge you pay annually for using your credit card. Travel rewards cards usually charge yearly fees. These fees normally range between $25 and $500. However, if you look at the credit card rewards and benefits, the charges are worth it.
2. Finance Charge
The finance charge is a fee you can avoid. It would help if you cleared the full balance every month. Credit card companies will calculate credit card interest on the balance you carry forward to the next month.
3. Balance Transfer Fee
You incur balance transfer fees when you transfer your debt from one credit card to another. The fee usually ranges between 3% to 5% of the amount you move. There are credit cards that charge an introductory 0% balance transfer fee. Interest savings may be used to cater for the transfer fee.
4. Cash Advance Fee
The cash advance fee is an amount charged for making a cash withdrawal using your credit card. The cost falls between 2% and 5% of the amount you withdraw. Use your debit card to make withdrawals to avoid these fees.
5. Foreign Transaction Fee
Many card issuers will charge international transfer fees for international purchases. The fees have a rate of 1% to 3% of a purchase. Most travel cards dismiss the international transfer fees to cater for customers who make international journeys frequently.
6. Late Payment Fee
If you fail to pay at least the minimum fee when it is due, the credit card issuer will charge you late payment fees. Some credit card companies do not charge this fee, but you risk your credit score if you fail to meet the minimum payment.
You can avoid the late payment fees if you subscribe to auto-pay.
7. Over-limit Fee
The over-limit fee is one of the ways that show how debit cards and credit cards are different. While you can overdraft in debit cards, it is not possible in credit cards unless you opt in to over-limit.
The first time you exceed your credit card limit, you will pay an over-limit fee of $25. You could pay up to $35 the second time you make an over-limit purchase within six months of the first over the limit transaction.
8. Returned Payment Fee
You will pay the returned payment fee when a transaction fails due to insufficient funds. Different cards charge different fees, but the common amount is $35.
There are many ways to avoid credit card fees, but you generally need to ensure you stay within your limit and that you have a credit balance before authorizing a transaction.
The Requirements for Each Card
The criteria you need to meet brings out significant differences between debit and credit cards. For debit cards, you will need a driver’s license, a social security number, a valid email address, and your employment information.
The personal information you provide depends on the card issuer. Multiple factors influence your credit card approval — for example, your credit score. A high credit score will mean a higher credit limit, and a lower credit score results in a low credit limit.
Should I Pay With My Debit or Credit Card?
Your financial goals and needs should determine which card you use.
Use Your Debit Card If
1. You Have Just Started Making Purchases With Cards
Use a debit card to gain the discipline and self-control to spend with a card. You will learn to spend less than you have in your checking account and to save. A debit card will help you to operate within a budget when dealing with daily expenses.
2. You Want to Earn Cashback With No Fees
Checking accounts also offer rewards. You will not incur any fees in debit rewards programs. For example, when you spend $3,000 monthly on the Discover Cashback Debit, you will earn a 1% cashback.
It is one of the differences between debit cards and credit cards. Credit cards will charge you to participate in the rewards programs.
3. You Want to Avoid or Get Out of Debt
If you’re going to get out of debt, a debit card is your only option. Furthermore, you should turn to it if you are struggling with debt. It will help you limit your expenditure and avoid debts.
Another difference between debit and credit cards comes up as credit cards get you into more debt while debit cards do not use any loans or debts.
4. You Want to Deal With Cash
Access to cash is another factor that shows how credit cards and debit cards are different. You can access your money at the register or ATMs without extra fees. You will have to pay a cash advance fee for any withdrawals you make on your credit card.
Use Your Credit Card If
1. You Want to Have Purchase Protection
There are credit cards that offer product coverage. It is useful for large purchases or online transactions. A credit card company will help tip the odds in your favor if you have a dispute with a merchant.
Debit card providers will hardly get involved in any dispute you have with a merchant.
2. You Want to Build or Rebuild Your Credit Score
A credit card with a small limit will help you build your credit score and history quickly. Debit cards and credit cards are different in this sector. Debit cards only help you build your budgeting skills rather than your credit score.
3. You Want to Gain Travel Rewards
There are credit cards that award travel points when you use them. You can convert these points to rewards like lower fees on checked baggage or free flights. These points can lower your vacation expenses helping you live a debt free life.
How to Use Both Cards to Maximize Your Finances
Yes, credit cards and debit cards are different. However, their differences also point out various strengths of each card. For example, you can start with a debit card, which will help you to build your budgeting skills and then advance to credit cards to help you build your credit score.
You can harmonize both financial tools to boost the state of your personal finance.
There Are Three Main Ways You Can Use Both Tools to Maximize Your Finances. They Are:
- Always have a budget for your expenditure.
- Do not spend more than you have in your bank account.
- Spend a credit balance you can pay in full every month.
Debit cards and credit cards are different, starting from where they draw their funds, how you acquire them, how they operate, their respective fees, and their requirements.
The main difference between debit cards and credit cards is that debit cards use the money you store in your bank account while credit cards use cash from a loan amount called a credit card limit.
While you may prefer either of the cards, it is better if you develop responsible skills and have them both in your corner.