Chris Bridges, Founder and CEO, VITAL Card
Credit cards and debit cards may not seem different when you look at them physically. Both have card numbers and expiration dates. However, while both are a convenient alternative to cash, their applications in practice are quite different.
When you swipe your credit card, you essentially borrow money from the bank or card issuer for a given period.
It gives you access to money you otherwise may not have and acts as a short-term loan.
On the other hand, debit cards are directly linked to your bank account and allow you to make purchases using money deposited in your account.
When you swipe your debit card, the money is deducted from your account immediately.
In most cases, people own at least one credit card and one debit card. So how do you decide which one to use to meet your spending needs?
What Are Credit Cards?
A credit card is issued to you by a financial institution, usually a bank or credit card company.
It allows you to borrow money from that institution, which you agree to pay back within a certain period, with interest and according to the institution’s terms.
What Are the Different Types of Credit Cards Issued?
Here are some of the most common types of credit cards: Standard Credit Cards allow you a revolving balance below a specific standard credit limit.
Your credit limit is directly proportionate to the outstanding amount from purchases made. The credit decreases after a purchase and increases once the payment has been made.
Typically, there is no annual fee for these cards.
- Balance Transfer Credit Cards have low introductory interest rates and fees on balance transfers from another credit card. This becomes useful, especially in cases of a high-interest rate balance on an existing card, and will save you money.
- Rewards Credit Cards offer rewards on credit card purchases in the form of cashback, points, or travel.
Rewards Credit Cards are really popular among frequent travelers as they can redeem their rewards on free flights and hotel stays, among other travel perks.
The better a credit card’s rewards program is, or the more benefits it offers, the higher the annual fee for it will be.
This is why it is always helpful to understand your card’s fees.
It might be an annual fee, a foreign transaction fee, a balance transfer fee, a cash advance fee, a late payment fee, or a returned payment fee.
- Charge Cards don’t have a preset minimum payment or finance charge, as the balances have to be paid in full. Failure to do so could lead to a late fee, charge restrictions, or card cancellation, depending on the terms of your card agreement.
- Secured Credit Cards are helpful to those with no credit history or damaged credit status and who require an initial security deposit on the card as collateral. The credit limit on this type of credit card is most often equal to the amount of the deposit made on the card, except in situations of any significant default.
However, it’s worth noting that you will be expected to make monthly payments on your secured credit card balance.
- Premium Cards, remain attractive to those interested in premium offers, including access to airport lounges, special events, and concierge services, to name a few.
What Are the Advantages of Using a Credit Card?
While there are tons of benefits, here are a few of the most common ones:
- Credit cards make spending more convenient by eliminating the use of cash.
- They help you build your credit history by maintaining a good credit score.
- Unlike debit cards, credit cards allow holders to reap discounts, travel points, and many other perks, like access to premium deals and exclusive venues.
- Their relatively high credit limits provide holders with a certain amount of flexibility regarding spending.
- Select credit cards sometimes offer additional warranties or insurance on purchases, over and above those provided by the retailer.
- In terms of fraud protection, credit cards offer much greater protection than debit cards in most cases. This is why shopping online with a credit card is a much safer bet and often preferred.
- In emergencies, credit cards are ideal for unplanned expenses and funds that you may not otherwise have available at your immediate disposal. This is where your credit card company comes in. They will extend you a line of credit until you pay the final amount at the end of the month, allowing you that extra time to make sure your emergency is taken care of.
- Credit card users are protected under the Fair Credit Billing Act, unlike debit card theft victims who are not offered a refund until a completed investigation.
- Unauthorized purchases and damaged or lost goods after purchase can be disputed by credit cardholders who are not responsible for the disputed charges. The amount is deducted and restored only if the dispute is withdrawn or resolved in the seller’s favor.
What Are the Disadvantages of Using a Credit Card?
The most considerable drawback of using a credit card is the interest you’re charged on every transaction.
The minimum payment is due every month, and the failure to pay back the money to the bank within this period can result in high outstanding balances, especially if multiple cards are used.
Consistently delaying payments and misusing credit cards could ruin your credit history and land you in massive debt.
What Are Debit Cards?
A debit card is used to make payments by deducting money directly from your checking account rather than borrowing money or taking credit from the bank.
Therefore, you typically cannot spend more money on your debit card than you have in your bank account.
What Are the Different Types of Debit Cards Issued?
There are broadly three types of debit cards:
- Standard debit cards make payments by taking money directly from your checking account, not as a loan from your bank.
- Electronic Benefits Transfer (EBT) cards allow qualifying cash benefit recipients to access their food and cash benefits to make purchases. It is issued by state and federal agencies.
- Prepaid debit cards allow someone without access to a bank account to electronically spend the amount of money they previously loaded in the card.
What Are the Advantages of Using a Debit Card?
- A debit card makes purchases directly from the money a cardholder already has. This removes the risk of debt and could help you stick to your budget, preventing you from the possibility of high-interest payments.
- The process for debit card approval is much faster and easier overall.
- Debit cards do not affect your credit history. However, this could also be a con in some cases, as you do not have an opportunity to build your credit history or demonstrate to lenders that you can responsibly pay off debts in time.
- If you find it hard to control or structure your spendings, a debit card is ideal because the money is being withdrawn from your savings or current account, barring you from overspending.
- When you withdraw money using your debit card, you access your own money, so no expense is involved. In comparison, when you use your credit card to withdraw cash, you withdraw money you don’t actually have. The bank will consider this a type of loan that you will have to pay back with a high-interest rate.
- A few debit cards, especially those issued by major payment processors like Visa and Mastercard, are starting to offer fraud protection services that credit card users typically enjoy.
- It can be cheaper to use than a credit card. For example, debit cards do not charge an annual fee or a fee for withdrawing cash at an ATM, whereas some credit cards rack up a cash advance fee and an interest rate.
What Are the Disadvantages of Using a Debit Card?
Even though debit cards don’t have annual fees, there are other costs associated with them like monthly maintenance, overdraft fees, returned item fees, or foreign ATM fees (if you use your debit card at another bank’s ATM).
The period you can report fraud or theft on debit cards is slim because your liability for fraudulent purchases comes down to how soon it is reported.
Failure to report in time will most often result in you being held responsible for some or all losses.
Most debit cards don’t have a rewards program, which means you won’t be able to earn points, miles, or cash backs any time you use your debit card to make a purchase.
Rewards could save you a lot of money and give you access to otherwise exclusive events. Therefore, using only a debit card for purchases means that you will be missing out on the added benefits of a credit card.
Which Card Is Best for You?
Depending on your financial situation, either of these types of cards could best match your needs.
For example, credit cards can help you build your credit history, provide you with the most fraud protection and reward you with multiple perks.
“Fair Credit Billing Act,” Federal Trade Commission
“What Is Electronic Benefits Transfer (EBT)?,” Food and Nutrition Service, United States Department of Agriculture
“What Is a Good Credit Score?” Experian