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Credit Card vs Debit Card: What’s the Difference?

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Although both types of cards can be used to pay for goods or services, there are key differences between credit cards and debit cards. Most notably, credit cards are funds issued by a bank, and debit cards receive funds directly from your existing bank account.

Many people have one of each in their wallet and it is helpful to use one or the other depending on the purchase or situation. There are many factors to consider when choosing which card to use.

This article will cover:

  • What is Debit Card and how does it work
  • Advantages and Disadvantages of Debit Card
  • What is a credit card and how does it work
  • Credit card advantages and disadvantages
  • Debit vs Credit: Which One Should You Use?

What is Debit Card?

A debit card is linked to your checking account. It allows you to use funds directly from your account for transactions, and also works as an ATM card for direct cash withdrawals.

Normally you cannot spend more than the amount in your account otherwise your transaction will be declined. Debit cards don’t charge interest or annual fees, and balance transfers aren’t allowed. Debit cards usually do not offer perks or rewards. However, at some banks you can earn interest on the money in your checking account.

How do debit cards work?

Your debit card puts a cap on the purchase amount. The merchant sends your transaction to the bank, and your bank sends the money to the merchant’s account. ATMs and many shops will require you to enter a PIN to use your card.

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Advantages and Disadvantages of Using Debit Card

Here are the pros and cons to consider when deciding whether or not to use your debit card:

pros

  • Difficult to overspend: Having a debit card makes it difficult to spend money you don’t have.
  • No Interest Payment: There is no balance to be paid each month, so you do not need to worry about the interest accruing.
  • No harm to credit history: If you are unable to consistently pay your bills on time, it may be better to use debit cards instead of credit cards because debit cards will not affect your credit score.
  • Can be used in stores and ATMs: You can use your Debit Card to make purchases as well as get cash from ATMs.
  • Fraudulent Activity Protection: You can get reimbursed for unauthorized debit card transactions with zero liability protection, as long as you report the charges promptly.

Shortcoming

  • You cannot create credits: Debit cards will help you build no credit history, which is important for boosting your credit score.
  • You may have additional charges: Even though you will not have to pay interest, you may have to pay ATM charges if the machine you are using is outside the network.
  • You must have funds in your account: A debit card uses funds directly from your checking account and those transactions are typically processed within 1 and 3 days, so you should have funds in your account to cover those purchases.

What is a Credit Card?

a Credit Card Allows you to access a line of credit to pay for goods or services. It acts as a monthly loan that you can use to make purchases and then make payments to the credit card company. A lender will determine the amount of credit you are approved for (your credit limit) based on factors such as your income and credit history. Unlike debit cards, credit card usage and payment history go on your credit report and affect your credit score. Credit cards allow cash advances and balance transfers. Additionally, they often offer perks and rewards.

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How do credit cards work?

When you transact, your card issuing bank pays the merchant. Every month you will receive a bill listing all purchases made. You can pay off the entire balance and avoid interest charges, or you can pay off a portion of the balance (minimum payment), and interest (APR) is charged on the balance.

If you don’t pay your credit card bill at all, late charges will apply and you may earn interest at the penal rate. If you neglect to make minimum payment payments for more than at least 30 days, you can damage your credit score.

Advantages and Disadvantages of Using a Credit Card

Here are the pros and cons to consider when deciding whether or not to use a credit card:

pros

  • Rewards and Perks: Credit cards allow you to earn rewards, such as cash back or airline miles.
  • Build Credit History: Credit card activity is sent to the three main credit bureaus – ExperianEquifax and TransUnion — Preparing a credit report. This credit report shows your complete credit history and is helpful when applying for loans, additional credit cards, rental leases and even some jobs.
  • Fraudulent Activity Protection: Your credit card comes with zero liability protection. So if someone uses your card without permission, inform your issuer immediately and you will not be held responsible for the same.

Shortcoming

  • Easy to repay loan: If you’re spending more than you can pay, it can be easy to build up debt over time.
  • You may be charged interest: If you do not pay your outstanding balance in full every month, you will be charged interest on the unpaid amount. This interest can compound quickly if you’re not careful.
  • Other charges: Credit cards have fees that can include balance transfers, return payments, late fees and – with some cards – annual fees.

Debit Card Vs Credit Card: Which One Should You Use?

When determining whether to use debit or credit, be aware of how you typically manage your money. If you know that you have a tendency to spend beyond your means or don’t keep a close eye on your expenses, a debit card can prevent you from getting into serious debt, and may be the best option for you. Is. Conversely, if you’re good at sticking to a budget and watching your daily purchases carefully, credit cards are a great way to earn rewards and build a credit history.

Building a credit history with your credit card is an important part of your financial journey. However, this is helpful only if you are able to pay your bills on time every month.

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