Credit vs Debit: What is the Real Difference?
If you want to improve your finances, you should understand the differences between credit vs debit. Here's what you need to know.
According to BusinessTech, credit card issuers may have reduced new card originations last year, but outstanding credit card balances climbed.
While some people have no choice but to use credit for purchases right now, others could avoid further debt if they would use a debit card as much as possible.
So, what exactly is the difference between the two types of cards? Here is what consumers need to know about credit vs debit.
Credit vs Debit Basics
There is a reasonable chance you might have both a debit card and a credit card. Debit cards and credit cards look the same and have the same purpose. However, there are several reasons why you should choose one over the other.
By using a debit card to make a purchase, you are transferring money from the bank account linked to your card. It is imperative to note that if you use a credit card to pay for a purchase, the company that issued you the credit card will pay. You can think of it as a loan you are getting from a credit card company. You do not actually make the payment for the purchase until you pay with the credit card company for the purchase.
Pros and Cons of Credit Cards
Credit cards have a lot of benefits that debit cards lack. Some of the pros of credit cards include:
- The potential to earn credit card rewards
- Protection against fraud
- The ability to build a credit history
- The purchase of goods or services, even if money is not available
As beneficial as credit cards can be, the credit card pros can easily outweigh the credit card cons.
First, many credit cards have an annual fee and late fees. You pay interest charges if you don't pay off your balance in full each month. Even if you carry over a low balance each month, interest adds up. The higher your credit card balance grows, the better your chance of getting into debt trouble.
People who end up with too much credit card debt can seek debt counselling through a debt management company for help.
Pros and Cons of Debit Cards
While debit cards are much safer for your finances, if you're someone who rarely pays off their credit card balance in full, most debit cards do not offer near the benefits that credit cards do.
While a debit card does not have an annual fee and does provide fraud protection, most debit cards do not give rewards, and using a credit card will not help you build a credit history. Like credit cards, debit cards can have many fees associated with the card's linked bank account.
The biggest debit card con for some is that you must wait until you have cash in the bank to make a purchase. This can be hard if you're struggling financially.
Do You Need Debt Counselling?
When it comes to credit vs debit, credit cards may be more convenient, but debit cards will help keep you out of debt. Even if you're managing your credit card debt now, a change in your circumstances could leave you in debt trouble.
If you've gotten into debt trouble, debt review can help you get back in control of your finances. Contact us today to speak with a debt management professional about debt counselling application
Conclusion: The workings of a credit and debit card
Although it is possible to use both cards to buy things, they draw money from various sources and apply it to diverse types of purchases. Because of this, they can each get utilized in diverse ways.
Credit Card
- Credit cards have credit limits. Credit limits establish the amount you are allowed to borrow from the bank. You will receive a credit limit based on your credit score and financial affordability.
- When you use your credit card, the bank that issued you the credit card pays the merchant for the purchase.
- When a credit card gets used for certain purchases, the consumer borrows money from the bank. The consumer then pays back some or all the borrowed money at the end of each month.
- Even if you do not have any available cash in the bank, you can still use your credit card for purchases, provided it is within your available credit limit.
- Credit cards have high-interest rates if the outstanding balance on the credit card does not get repaid in full. Making delinquent payments will also result in higher interest charges and penalties for your credit scores.
- Credit cards and how they affect credit scores. Making payments on time each month will help you improve your credit rating. In the same way, skipping any monthly repayment will result in your credit score getting knocked down.
Debit Card
- Debit cards do not have credit limits attached to them. The funds you use for any purchases you make with your debit card will be deducted directly from your savings or cheque account.
- If you don't have any funds in your account, you will not be able to make purchases. Overdrawn accounts are subject to additional bank fees. If this happens, it will negatively impact your credit score with the bank.
- Debit cards do not attract any monthly interest charges or fees.
- Debit cards and how they affect credit scores. Your credit history is not affected by debit cards or how you manage the account. Using debit cards excessively will not hurt credit scores.
Sources - Other good reads