Imagine this: You’re at the cash register or POS, and the cashier is asking you, “Debit, or credit?” If you’re anything like most folks, you’ve been asked this question hundreds of times before, but when is the last time you really thought about your answer? Did you carefully consider which card was better, or simply reach into your wallet and grab the first card you instinctually wanted? And as for your debit card, when was the last time you used it for something other than an ATM?
Today, we’re diving into the differences between and pros and cons of both credit and debit cards. You’ll learn:
How each type of card works.
The advantages and disadvantages of each card.
How to consider what card is right in any buying situation.
Here’s the deal on how credit cards work. Credit cards are generally issued by a card company, like Visa, Mastercard, American Express or Discover. When you are approved for a card, the issuer gives you a credit limit, wherein you can make purchases using their money, instead of drawing from your own bank account. You also agree that you will pay back any of the debt on the card at specified due dates each month. Any unpaid balances are subject to interest, which can be as high as 22% on some cards. In this way, your credit card acts as a mini loan lender, giving you money to use as you please and requiring payment later.
Your credit card itself is a usually plastic, wallet-sized payment card with a magnetic strip, raised card information and an EMV enabled chip. Your credit card can be used at any merchant that has a card reader or POS terminal which accepts payments from your credit card issuer (for example, some merchants do not accept Discover cards).
Like a credit card, a debit card is a plastic card, usually with a magnetic strip and an embedded EMV chip. How does a debit card work? Debit cards are connected directly to your bank account, and they act the same way as writing a cheque. When you use your debit card, funds are automatically taken out of your account and transferred to the merchant.
Debit cards are issued by your bank, though they are usually backed by the same companies that issue credit cards. Your bank may also have a credit card program with a selected issuer, allowing you to get both a credit and debit card from the same institution.
Can you use a debit card as a credit card? While debit cards are taken everywhere that credit cards are accepted, you cannot use a debit card to defer payment in the same way as a credit card.
Credit cards are month-long loans that end on your payment due date. The biggest advantage of credit cards is that you can defer payment on items, and you only have to pay one bill a month, instead of paying dozens of smaller bills for each transaction.
Other advantages of credit cards include:
Credit cards help build your credit history
They offer rewards like cash back, miles or other rewards for your purchases.
Offers better protection from fraudulent charges. When a fraudster uses your credit card, they are taking money from the issuer, instead of stealing directly from you and draining your bank account!
Disadvantages of Credit Cards:
Irresponsible use or inability to meet minimum payments can hurt your credit score
High-interest rates lead to paying more in the end
Easy to spend more than you can afford
The biggest advantage of debit cards is that you can’t spend money you don’t have. If you don’t physically have enough money in the bank to cover a transaction, your debit card will not authorize the sale. This is incredibly helpful for those who are on a tight budget and don’t want to overspend or those who have a history of credit card debt, who want to be more in tune with what’s really going on in their checking account.
Other advantages of debit cards include:
Money is taken out automatically, so you get a real-time view of your budget
You can set up automatic transfers to pay recurring bills
You can use your debit card at ATMs to withdraw cash
Spending on a debit card won’t affect your credit score
Disadvantages of debit cards:
Less secure. If someone steals your card, they are directly spending your money.
If you overdraft, you may have to pay a fee
Debit cards can’t help your credit score
You can only spend what you have in the bank right now.
When considering the question of credit vs debit for a purchase, the important things to consider are your budget, the size of the purchase, and how you generally spend money. If you don’t have enough money in your checking account to pay for an item immediately, or the purchase is large, and you’d like to pay it over time, using a credit card gives you a helpful grace period, builds your credit score and can even help you earn rewards. However, if you have a history of overspending, have a tight budget you need to stick to, or want to avoid high interest rates, a debit card may be the better choice.
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