What is the difference between a credit card and a debit card?

The question of what’s the difference between a debit and a credit card is a common question these days, especially with the rise of debit cards that have a credit function. The difference is primarily functional and would help you decide the times when it’s best to use a debit card or a credit card.

Various banks issue both debit and credit cards that use Visa or MasterCard as the payment processor whilst the banks supply the funds. American Express (AMEX) is another provider of credit cards that some people prefer, they act as both the issuer and the payment processor.  

Some merchants may not register for all types of cards which would mean your preferred card may not be accepted. So, practically speaking, it’s always good to have multiple payment types, including both debit as well as credit cards handy in your wallet.

When it comes to the difference between the two types of cards, physically, they are quite similar. Both are plastic cards with a 16-digit card number (except AMEX cards that have a 15-digit card number) and your name on the front and a magnetic stripe on the back. The similarities also include how they can be used. Both credit and debit cards, if they’re Visa or MasterCard debit cards, can be used for internet transactions. But this is where the similarity ends! To get a better understanding of what’s the difference between a credit card and a debit card, you should look at the features, benefits, and uses of both.

How to tell the difference between a credit and a debit card

• Features of a debit card 

A debit card allows you to access your own funds held in your transaction account, either through an ATM or at a retail outlet. Most banks provide a debit card, free of charge with any new transaction account. These days most debit cards can also be used as credit cards for online payments but using your own funds. There is no interest charged for using your debit card as you’re using your own money, but you may have a daily withdrawal limit.

This limit is put in place as a safeguard to reduce the risk of misuse of your debit card and to help protect you from any unlawful transactions. As long as you have money in your account, you can spend it and some banks will allow you to overdraw a small amount but may then charge interest if this is not corrected. Some debit cards also offer you rewards for spending, but it’s not a standard feature. When you open a transaction account with your bank, you can ask about the debit card options the account offers. 

• Features of a credit card 

A credit card, as the name suggests, is a card that offers you credit like your own personal line of credit. This can then be used for spending up to whatever limit agreed to by you and your bank or card issuer. A credit card usually comes with additional costs such as annual fees, interest charges and other possible fees and charges. If you only use your credit card in times of emergency or repay the full amount each month most of these charges won’t apply.

You may look at finding a credit card with a low or no annual fee if this is the case to save on long-term costs. When you sign up for your credit card, a spending limit is set which you can then increase or decrease by applying with your bank. There is also a minimum payment that you have to make each month to help repay and the debt you’ve accrued. There is also a range of credit cards with rewards programs that are linked to spending. However, these may cost more both in terms of fees and interest rates. You’ll need to complete an application and evaluation process before getting a credit card that’ll include reviewing your credit history.

Credit card advantages and disadvantages

Having a credit card can bring with it a host of benefits like reward points on eligible purchases, cashback, cashless shopping, and even the possibility of an interest-free credit period. It can also be a smart financial decision as it helps you build up a good credit score if you use your credit card sensibly and make payments on time. Building up your credit score will prove to be an investment for the future if you ever need to apply for a loan like a home loan, a personal loan or a line of credit.

It’s also important to consider what the purpose of you owning and using a credit card is. It may be that having a credit card in your wallet gives you a sense of financial security. You feel safe in the knowledge that you’ll be able to make that crucial purchase if the need arises and you don’t have the funds in your bank account. Another reason for choosing a particular bank’s credit card could be attractive rewards but be careful; these rewards don’t encourage overspending. 

However, you need to remember the risks of having a credit card. There is the possibility of overspending if you know you have the card there.  You also have to be mindful that if you default on or delay your credit card payments, you’ll create a bad credit score for yourself. 

Debit card advantages and disadvantages

A major advantage of using your debit card is that you’re utilising the money in your bank account without withdrawing cash or sign cheques. Unlike a credit card, you’re not likely to overspend as you cannot spend beyond the funds in your account, which helps you stay within your budget.

Since there is often no cost attached to a debit card, you can use it freely without ever having to worry about ongoing fees or interest charges. Even if you’re ineligible for a credit card, you can still have a debit card which is a Visa or MasterCard. This card can then be used in the same way as a credit card but uses the funds in your bank account.

It’s always safer to have a debit card in your wallet rather than carrying large amounts of cash on you. Cheques are no longer widely used and often come with delays. Using a debit card doesn’t affect your credit score or history but using a credit card irresponsibly affects both.

When it comes to the difference between a credit card and debit card, both have their pros and cons. It is observed that the younger generation prefers to use credit cards, and the more conservative spenders tend to use debit cards. 

The key component to the debate of credit vs debit card is you, so you should do your research and even compare credit cards or transaction accounts online.

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