Thursday, March 10, 2022

Difference between a Credit Card and Debit Card

Both debit cards and credit cards tend to look identical with similar card numbers, magnetic strips, EMV chips, and expiration dates. However, when comparing a credit card to a debit card, it’s important to be aware of the key differences. Debit cards let you use your money by drawing funds you have deposited in your account at the bank. Credit cards allow you borrow money from a card issuer up to a certain limit in order to purchase items. 

Credit Cards

A credit card is typically issued by a bank or another financial institution and allows the cardholder to borrow funds. You agree to pay back that money with interest according to the terms. There are different types of cards, including standard cards, reward cards, premium cards, secured credit cards, and balance transfer cards. There are benefits to using credit cards, such as earning travel points, cash back, or discounts that aren’t available to debit card users. Credit cards do give some advantages over debit cards even though there are some downsides. Credit cards can help you build your credit history.

If you are a responsible spender, you can raise your credit score with timely payments and keep your card balance low. Some credit cards give you extra protection and a warranty on purchased items. There is also fraud protection that is much better than what is found on debit cards. The disadvantages of credit cards include potential credit score impacts, cost, and debt. Since credit cards are basically a short-term loan, you have to pay back what you are spending with interest and many cards have high-interest rates. You may even be charged an annual fee or other fees, such as a late payment fee, balance transfer fee, or a foreign transaction fee. If a credit card has a good rewards program, then it’s likely the annual fee will be higher. 

Debit Cards

Debit cards are payment cards that allow you to deduct money directly from your checking account instead of a loan from a bank. You get the same convenience of a credit card and some of the consumer protection. There are other types of debit cards that don’t require you to have a checking account and these are prepaid debit cards or electronic benefit transfer cards. With debit cards, you can avoid debt since you are just spending the money you already have in your account.

There is also some fraud protection, even though it’s not as much as with credit cards. Debit cards also don’t charge annual fees and, if you use your bank’s ATM, there is no fee for withdrawing cash. However, you may have to pay fees in order to keep your checking account open with a bank. With debit cards, there are no rewards, so you don’t get cash back, miles, or points on purchases you make using your debit card. You also won’t build credit. 

When comparing a credit card to a debit card and figuring out which option is best for you, think about your spending habits and if certain things, such as rewards, are more important to you.

Disclaimer: I received one or more of the products or services mentioned above for free in the hope that I would mention it on my blog. Regardless, I only recommend products or services I use personally and believe will be good for my readers. I am disclosing this in accordance with the Federal Trade Commission's 16 CFR, Part 255: "Guides Concerning the Use of Endorsements and Testimonials in Advertising. I have used direct text from the website of the company/product I am promoting to facilitate in my review.

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