Credit cards and debit cards look similar and they are accepted at many places. They both eliminate the need to carry cash with you and provide convenience each time you plan to make a purchase or cover some expense.
However, these tools are also different in the way they pull the funds. A credit card charges money to your credit line while a debit card takes funds from your checking account. Keep on reading to find out the key differences between these options as well as their pros and cons.
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What Is a Credit Card?
This card allows consumers to borrow funds against a line of credit, known as the card’s credit limit. A credit card may be utilized for various transactions that will be reflected on the client’s bill. The card issuer pays covers the purchase for you, while you receive the bill and pay the issuer later.
The interest rate is charged on the purchases if the holder carries a balance from month to month. There are guaranteed approval credit cards with $1000 limits for bad credit holders but most issuers prefer to deal with good credit applicants.
The interest rates on credit cards are usually higher compared with other lending options. Besides, the payment history and the credit card balance may affect the credit score of the borrower. The bank or the issuer usually sets a credit limit based on the credit history of the client. If you pay the balance in full each month, you will avoid late fees and interest. It can also be a suitable option to boost your existing rating.
What Is a Debit Card?
Debit cards use funds directly from your bank account when you decide to make a purchase. They offer the same convenience as credit cards but don’t charge interest. They work by placing a hold on the sum of the purchase you are about to make. After that, the transaction is sent to the bank by the merchant, and the funds are transferred to the merchant’s bank account.
Make certain you keep a running balance of your bank account so that you don’t overdraw your account. A personal identification number (PIN) will be utilized with your debit card at ATMs or stores. Most merchants allow consumers to use their debit cards without a PIN. The receipt is signed like you would with a credit card.
A great advantage of the debit card is that there are no interest rates. The credit history of the holder won’t get affected by their spending. Besides, the funds will be taken from the bank account straight away if you pay with a debit.
Pros and Cons of Credit Cards
- Build credit history. The usage of the credit card is reflected on the borrower’s credit report. This report will include the data on low utilization ratio, on-time payments, and positive history. Negative items such as delinquencies and late payments will also be reflected there. According to a consumer credit review, the average credit rating was 714 in 2021. It is considered a “good” score based on the FICO scale. Responsible users may boost their credit by making timely payments and keeping their balance low.
- Warranty and purchase protection. Additional warranties or insurance on purchased items can also be provided by some credit card issuers. Consumers may have the price and purchase protection built-in as well.
- Fraud protection. If you report the theft or loss in a timely manner, you will get fraud protection. Debit card holders may qualify for the same protection under the Electronic Fund Transfer Act provided that they report it within 48 hours of discovery.
- Spending may lead to debt. If you use your credit card frequently and forget about paying down the balance each month, the interest and debt will accumulate. This debt may affect your credit rating in the long run. Also, interest and late payments often apply.
- Credit rating impacts. If you keep your balance low and pay the bill on time, you will maintain good FICO scores. Those who have the habit of maxing out their credit cards or paying late will have lower ratings.
- Interest rates and fees. Each credit card comes with some interest. The fees and interest change and they vary among the credit companies. The higher the interest of the credit card, the more it will cost you to carry a balance each month.
Pros and Cons of Debit Cards
- Avoid debt. You use the funds you already have in your bank account, so you avoid debt. If you cover the purchases with your debit card, you won’t be tempted to overspend and won’t need to pay interest. Usually, consumers spend more money using plastic than cash.
- Fraud protection. Credit cards used to provide greater fraud protection before. Nowadays, debit cards also offer more protection to consumers. Try to report theft or fraud as soon as you discover it so that there aren’t any unauthorized purchases in your name.
- No annual fee. Compared to credit cards, there is no annual fee for debit card usage. You can withdraw your own money from the debit card at the nearest ATM without any fees as well. Credit cards offer a cash advance but they charge a fee for this convenience as well as additional charges or penalties.
- Won’t build credit. It’s essential to have good or excellent credit if you want to show your creditworthiness to lenders. However, the debit card won’t help you build or improve your credit. So, if it’s too low and you need to boost your rating right away, it’s better to utilize your credit card.
- No rewards. Consumers don’t have a chance to earn any cash back, miles, or points unless they have rewards checking account. You might miss out if you only pay with your debit card as bonuses and rewards can save you funds.
- Fees. Although there are no annual fees, you may be asked to pay overdraft charges, returned-item fees, foreign ATM charges, or monthly maintenance fees.
The Bottom Line
Debit and credit cards may look alike, but they have different advantages and downsides. If you want to minimize your spending, you need to use your debit card. If you want to get cash back and rewards, using a credit card is beneficial. No matter which option you choose, learn all about the fees associated with the account.