What’s the Difference Between Credit Cards or Debit Cards ?

Credit Cards Vs. Debit Cards: An Overview

Credit cards and debit cards generally look the same, with 16-digit card numbers, expiration dates, magnetic strips, and EMV chips. Both can make shopping in-store or online easy and convenient, with one important difference. Debit cards allow you to withdraw funds from your bank account. Credit cards allow you to borrow money from the card issuer up to a certain limit to purchase goods or withdraw cash.

Your wallet probably contains at least one credit card and one debit card. The convenience and protection they offer is hard to beat, but they have key differences that can significantly affect your pocketbook. Here’s how to decide which one to use to best suit your spending needs.

Important points

Credit cards give you access to a bank-issued line of credit, while debit cards deduct money directly from your bank account.
Credit cards offer better protection to customers against fraud compared to debit cards linked to bank accounts.
While newer debit cards offer more credit card-like protections, many credit cards no longer charge annual fees.
When comparing a credit card to a debit card linked to a bank account, it’s important to consider the fees and benefits.

What Is a Credit Card?

A credit card is a card issued by a financial institution, typically a bank, and enables the cardholder to borrow funds from that institution. The cardholder agrees to repay the money with interest as per the terms of the institution. Credit cards are issued in the following different categories

Standard cards extend a line of credit to their users for purchases, balance transfers and/or cash advances and usually have no annual fee.
Premium cards offer perks like concierge services, airport lounge access, special event access, and more, but they usually have higher annual fees.
Rewards cards offer customers cash back, travel points or other benefits based on how they spend.
Balance transfer cards have lower introductory interest rates and fees on balance transfers from another credit card.
Secured credit cards require an initial cash deposit that the issuer holds as collateral.
Charge cards have no predetermined spending limits but often don’t allow unpaid balances to carry over from month to month.

Credit card users can avail cash back, discounts, travel points and many other perks unavailable to debit card holders using rewards cards. Rewards can be applied on a flat rate basis or tiered rates. For example, you might have a card that offers unlimited two miles per dollar on purchases and another

That gives three miles per dollar on travel expenses, two miles per dollar on dining and one mile per dollar on everything else. You can then use the earned miles to book future travel arrangements.

Advantages of using a credit card

Credit cards may offer some advantages over debit cards, although they may also have some disadvantages. Take a closer look at the pros and cons of spending with a credit card.

Build a credit history

Credit card usage appears on your credit report. They include a positive history, such as on-time payments and a low credit utilization ratio, as well as negatives, such as late payments or delinquencies. Your credit report information is then used to calculate your credit score. Responsible spenders can increase their score with a spending history and by making on-time payments and keeping their card balances below their card limits.

Many credit card companies offer free credit score monitoring and tracking as a card benefit, so you can monitor your progress while building credit.

Warranty and Purchase Protection

Some credit cards may also offer additional warranties or insurance on purchased items that go beyond what the retailer or brand offers. For example, whether it provides coverage if an item purchased with a credit card becomes defective after the manufacturer’s warranty has expired.

It’s worth checking with the credit card company to see. Or you may have purchase and price protection built in to help you either replace items that are stolen or lost, or refund the price difference when an item you’ve purchased is sold elsewhere for less.

Fraud Protection

As long as the customer reports the loss or theft in a timely manner, their maximum liability for purchases made after the card goes missing is $50. The Electronic Funds Transfer Act gives debit card customers the same protection against loss or theft—but only if the customer reports the discovery within 48 hours. After 48 hours, the card user’s liability increases to $500; After 60 days, there is no limit.

quick fact
In most cases, credit cards offer more fraud protection than debit cards.

Other Credit Card Advantages

The Fair Credit Billing Act allows credit card users to dispute purchases of unauthorized purchases or items damaged or lost during shipping.

If the item was purchased with a debit card, the charge cannot be refunded unless the merchant is willing to do so. What’s more, those whose debit cards have been stolen don’t get their refund until the investigation is complete.

Conversely, the credit cardholder is not responsible for disputed charges; The amount is usually deducted immediately and restored only if the dispute is withdrawn or settled in favor of the merchant. Although some credit and debit card providers offer zero liability protection to their customers, the law is more forgiving for credit cardholders.

If you need to rent a car, many credit cards offer some type of collision discount

Even if you choose to use a debit card, many car rental agencies require customers to provide credit card information as a backup. The only way out for the customer is to allow the rental agency to place a few hundred dollars as a security deposit on the bank account’s debit card.

Do all credit cards charge interest?

All credit cards eventually charge interest on monthly balances, even if they offer you a 0% interest promotion. This interest rate is based on Annual Percentage Rate (APR). To avoid paying interest over the long term, pay off your balance in full every month.

Can Anyone Get a Credit Card?

Most people can apply for and receive credit cards, but if they have bad credit history or no credit, the credit cards they qualify for may not be as helpful. Those with no credit or very bad credit can apply for a secured credit card, where the credit line is secured by a deposit when the card is opened. For more attractive rewards cards, higher credit scores are required.

Disadvantages of using credit cards

The main disadvantages of using credit cards include debt, credit score impact and costs.

Spending can lead to debt

When you shop with a credit card, you’re spending the bank’s money, not your own. This money has to be returned with interest. At the very least, you need to make the minimum payment every month. Accumulating high balances on multiple cards can make it difficult to keep up with monthly payments and put a strain on your budget.

Credit Score Impacts

Paying your bills on time and keeping credit card balances low can help your FICO score. However, credit card abuse can damage your credit history if you make a habit of making late payments, maxing out one or more of your cards, closing old accounts, or repeatedly applying for new credit.

quick tip
Set up credit card alerts to notify you about payment due dates and card balances, so you can make payments on time and avoid maxing out your credit limit.

Interest and Fees

Because a credit card is essentially a short-term loan, you have to pay back what you spend with interest. The interest rate and fees that the credit company uses to calculate your annual percentage rate (APR). The higher the card’s APR, the more it will cost you to carry a monthly balance.

Be aware of whether your card charges an annual fee, foreign transaction fee, balance transfer fee, cash advance fee, late payment fee, or returned-payment fee. As a general rule, the better a credit card’s rewards program and the more benefits it offers, the higher the annual fees.

What is a debit card?

A debit card is a payment card that makes payments by debiting money directly from the customer’s checking account, rather than borrowing money from a bank or card issuer. Debit cards offer credit card convenience and similar consumer protections when issued by a major payment processor such as Visa or MasterCard.

There are two types of debit cards that do not require the customer to have a checking or savings account, as well as a standard type.

Standard debit cards are debited to your bank account.
Electronic Benefits Transfer (EBT) cards are issued by state and federal agencies to allow eligible users to purchase their benefits.
Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount preloaded on the card.

Frugal consumers may prefer to use a debit card because there are usually few or no associated fees unless users spend more than their account and are charged an overdraft fee. (The no-fee advantage doesn’t apply to prepaid debit cards, which often charge activation and usage fees, among other costs.) In contrast, credit cards typically charge annual fees, over-limit fees, late payment fees, and more. Penalties other than monthly interest on card balance.

Advantages of using a debit card

Just like credit cards, debit cards can have ups and downs.

Avoid debt

A debit card draws money on the money the user already has, eliminating the risk of taking out a loan. Retailers know that people typically spend more when using plastic than they would if they were paying cash.

By using a debit card, impulsive spenders can avoid the temptation of credit and stick to their budget. This can help keep you out of high-interest debt.

Fraud protection

In the past, credit cards offered far more fraud protection than debit cards. Some debit cards—especially those issued by payment processors, such as Visa or Mastercard—are beginning to offer more protection than that enjoyed by credit card users.

The key is to report fraud or theft as soon as you notice it. Your liability for fraudulent purchases is determined by the period in which they are reported. If you wait too long to notify the bank that your card has been used for an unauthorized purchase, you may be held liable for some or all of the loss.

Since a debit card is linked directly to a bank account, fraudulent purchases can quickly dry up the account or lead to an overdraft. This cannot happen with credit cards as they are returned at a later date.

No Annual Fee

Although many credit cards charge an annual fee, debit cards do not. There is no charge for withdrawing cash from your bank’s ATM using your debit card. Credit cards, on the other hand, may charge cash advance fees and higher interest rates for that convenience. However, you may pay other fees to maintain your checking account.

tip
Cash advances on credit cards have no grace period; Instead, interest starts accruing immediately.

Disadvantages of using a debit card

As with credit cards, the biggest downsides to using a debit card include the credit score impact and costs.

No Rewards

Unless you have a rewards checking account, you won’t earn any points, miles or cashback on purchases made with your debit card. Because rewards can save you money, depending on how you redeem them, you can lose them if you only spend with a debit card.

Will not build credit

Building good credit means showing lenders that you can responsibly repay the money you borrow. When you spend with a debit card linked to your bank account, you don’t have the opportunity to do so, so using a debit card won’t help you establish or build a credit history.

Fees

While debit cards don’t have an annual fee, you may pay other fees for keeping a checking account. These may include monthly maintenance fees, overdraft fees if you overspend from your account, fees for returned goods, and foreign ATM fees if you use your debit card at another bank or financial institution’s machine.

Are debit cards the same as credit cards?

While they may look similar and share similar features such as 16-digit card numbers, expiration dates, and branded Visa or MasterCard logos, credit cards and debit cards differ in important ways. The main difference is that debit cards are linked to a bank account and the money is withdrawn directly (like a cheque). A credit card, on the other hand, does not withdraw any money immediately and is subject to any accrued interest charges that must be paid back in the future.

Can you earn rewards with a debit card?

Generally, no. While debit cards don’t earn points or miles for every purchase, the accounts they draw money from can offer perks to users in exchange for certain transactions. Standard debit cards also often offer a round-up feature that allows users to transfer small amounts of money to a savings account, a feature not possible with credit cards.

Is a credit card safer than a debit card?

Credit cards usually offer more consumer protection against fraudulent purchases than debit cards. This fraud protection may not extend as generously or readily to debit card purchases.

Bottom line

Credit and debit cards may look similar, but their advantages and disadvantages are very different. If building credit and cashing in on rewards is important to you, credit cards are essential tools for your financial journey. If you prefer to keep tight control over your finances, a debit card is a good bet. No matter what you choose, make sure you know the fees associated with each account.

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