By Aniket Bose. Edited by Arjun Chandrasekar.
Overview
Credit and debit cards almost look identical:16-digit card numbers, expiration dates, and personal identification number (PIN) codes, etc. Both of these cards make it easy and convenient for their users to make purchases in stores or online, with one key difference. While debit cards allow their users to spend their money by drawing on the funds they have deposited in the bank, credit cards allow their users to borrow money from the card issuers up to a specific limit for purchasing items or to withdraw cash. Credit cards give their users access to a line of debt issued by a bank, whereas debit cards directly deduct money from the user’s account.
What is a Credit Card?
A credit card is a card that is issued by a financial institution, usually a bank, and this card enables the cardholder to borrow funds from that financial institution. When people apply for a credit card, they are agreeing to pay back the money with interest, which can vary depending on the financial institution. Credit cards are issued in four main categories: standard cards, rewards cards, secured cards, and charge cards. Credit card users can redeem cash, discounts, travel points, and many other perks available to their users by using rewards credit cards, which debit cardholders don’t have access to. These rewards can then be applied on a flat-rate basis or tiered rates. For instance, suppose you have a card that offers unlimited 2 miles per dollar on purchases and another that offers 3 miles per dollar for travel spending, 2 miles per dollar for dining, and 1 mile per dollar for everything else. Then from these perks, you can use the miles that you earned to book potential future travel arrangements. Every time you use a credit card, it is reflected on your credit report. This credit report includes positive history, such as on-time payments and low credit utilization, as well as negative histories like late payments or fraud. All of the information on someone’s credit report is used to calculate their credit scores. To raise your credit score, it is important to pay your bills on time and by keeping your card balances relatively low to their card limits.
What is a Debit Card?
A debit card is a payment card that makes payments by deducting money directly from a consumer’s checking account instead of being on a loan from a bank. Debit cards offer the same convenience as credit cards and similar consumer protection is also issued when the major payment processors like Visa or MasterCard are processed. These debit cards that are issued by Visa or MasterCard have now started to provide a lot more security and protections that are mostly available to credit cards. Debit cards are issued in three main categories: standard cards, electronic benefits transfer (EBT) cards, and prepaid cards.
Cautious consumers prefer to use debit cards over credit cards because there are typically few or no associated fees unless the consumer spends more than what is in their account which leads to an overdraft fee. By contrast, credit cards charge their users with annual fees, over-limit fees, delayed payment fees, and many other penalties along with monthly interest rates on the card’s outstanding balance. A debit card transacts money that the consumer already has in their checking account, which helps in eliminating the danger of potential debt. When impulsive consumers use their debit cards, they can avoid the temptation of credit and stick to their budget. This will help in keeping consumers out of high-interest debt. The main reason why some people prefer not to have a debit card is that it does not build credit or improve your credit score like a credit card does. There are also not a lot of rewards for having a debit card unless the consumer has a rewards checking account.
Conclusion
Credit and debit cards may look very similar to one another, but they are used in different situations. Debit cards allow you to spend money on items by withdrawing the funds you have in your checking account at a bank. Credit cards allow you to borrow money from the card issuer (usually from the bank) up to a certain price limit for purchasing items or withdrawing cash. Most people usually have at least one credit card and one debit card.
