Credit Card vs Debit Card
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It’s easy to conflate credit and debit cards in your mind, believing that they both serve essentially the same functions. Each card is a convenient alternative to cash or cheque and both are accepted widel, and they can be used in store or online.
That’s about the extent of their similarities, however.
There are crucial differences between the two cards which make them more suited for certain situations than others. This is especially true for small business owners who will be making informed purchases that directly relate to their income and livelihood. Being clear on the differences between the two is a huge advantage for anyone, but especially entrepreneurs.
In this post we’ll break down the differences between debit and credit cards: what each one is, the pros and cons of using them, and which one to choose for your purposes.
Credit card vs debit card in a nutshell
- A debit card will deduct fees from your savings or checking account
- There are two distinct types of debit cards: standard and prepaid debit
- Debit cards offer the chance to spend without accruing debt and are protected from fraud
- Debit cards are also unable to give you a credit history and can still carry annual fees
- A credit card is issued by a financial institution from whom the user borrows money to spend and repays with interest
- Credit cards allow you to build a credit history and some contain special purchasing offers and extra warranties
- If you fail to pay back the money plus interest, you can damage your credit rating which can have dire consequences
- Choosing whether to have a credit or debit card is about assessing your financial needs and clarifying your future spending plans
What is a debit card?
Usually issued to you by your bank or financial service, your debit card will deduct funds from your checking or savings account when you make a purchase. Debit cards offer secure, protected payments and are manufactured by the major card companies like Visa and Mastercard. They are an efficient and easy way to make payments directly from your account, thus accruing no debt to be paid off later.
There are types of debit cards which offer different features:
- Standard debit cards, which draw from your bank account (also called EC Cards in Germany)
- Prepaid debit cards, which allow you a fixed amount on a card connected to a bank account that isn’t your own
What are the pros of debit cards?
Debit cards are more suited to frugality. With a debit card you won’t go into debt or spend more than you can afford, because the spending amount is limited to the contents of your bank account.
Unique fraud protection
While card manufacturers usually imbue credit cards with more protection, debit cards are beginning to enjoy much of the same safety protection as they become more widely used. With debit cards, you will be alerted by your bank as soon as fraudulent spending is detected. And because the card is linked directly to your account, you can have control over how much money is in the account from which it extracts funds at any one time.
No annual fees or debt accrual
You won’t pay an annual fee for your debit card and as long as you make transactions at your bank’s ATMs, you won’t incur any withdrawal fees. Some banks won’t even charge for transactions at any ATMs.
While accruing debt is part of the deal with a credit card, your debit card will allow you to remain debt free. Impulsive shopping trips can always be curbed more easily with a debit card, being limited to the contents of your account and without charging fees will lessen the severity of any spending spree.
What are the cons of debit cards?
Due to their simplicity, debit cards miss out on some of the features awarded to credit card users.
Points, air miles, and cashback on purchases are all features reserved for credit cards. It’s important to consider this if you’re interested in investing in your purchases, because credit cards offer the opportunity to invest in rewards received with every purchase.
Can’t build credit
If you hope to build up a positive credit rating with your debit card, you unfortunately won’t be able to. Debit card spending is isolated purchases, meaning there’s no possibility for you to build credit for the purposes of buying a house or other things related to your credit rating.
While you’re free from annual fees, you may be subject to things like maintenance fees, overdraft, item returns, and transaction fees at foreign ATMs.
What is a credit card?
Issued by a financial institution, when you make purchases you are borrowing money from that institution, instead of extracting them from your personal account as with a debit card. You pay back the money you borrow with interest, entering a financial relationship between cardholder and institution.
There are more types of credit cards than debit cards, and the features are mostly related to the rewards you can earn for using a credit card:
- Standard credit cards, with which a line of credit is extended to you as the user to make purchases and balance transfers
- Premium credit cards, which charge higher fees but allow specialist rewards including in-flight lounge access, event access, and more
- Rewards cards, which benefit users with cashback on purchases and travel points
- Balance transfer cards, which have low introductory interest rates and fees when you make a balance transfer from another card
- Charge cards, which have no preset spending limit but don’t allow unpaid monthly balances to carry over
What are the pros of credit cards?
Both debit and credit cards share certain advantages such as fraud protection, however there are more rewards for the credit card user. This is because you are investing more in signing up for a credit card, creating a mutually beneficial relationship with the issuer.
Building your credit rating
Each credit card bill you pay on time will contribute to your positive credit rating. Keeping your balance low relative to your card limit will ultimately give you a positive credit history, which can be used to apply for loans at the bank to make bigger purchases.
Warranties and purchase protection
Certain cards provide insurance or warranties on items that may go beyond what the retailer offers. You may be able to earn a refund on your credit card for an item that becomes defective after the retailer’s warranty has expired. It’s also possible to receive price protection for stolen items, or receive a refund of the difference when you find the same item sold for cheaper.
What are the cons of credit cards?
There are drawbacks to credit card use, however. Because you enter into a financial relationship with the issuer, you are required to keep up with on-time payments and to pay back with interest. Failing to do so can result in damages to your financial reputation.
Because you’re spending money you’ve borrowed from the bank, there are consequences for failing to pay it back on time and with interest. You may put a strain on your finances and affect your budget and savings negatively if you cannot keep up with at least the minimum payments.
Bad credit score
A poor credit history arises from failing to make the minimum payments and accumulating too much debt. This will result in a bad credit score which may make it difficult to take out loans, put down property payments, even in some cases applying for jobs. In Germany, your SCHUFA is greatly affected by your credit score and can result in difficulty finding an apartment to rent.
High annual fees
Find out if your chosen card charges the following fees:
- Annual fee
- Foreign transaction fee
- Balance transfer fee
- Cash advance fee
- Late payment fee
- Returned payment fee
All of these can add up to costly extra fees on your purchases. If you imagine you will be making a lot of balance transfers or foreign transactions, you may want to rethink getting a credit card or find another issuer.
|Card type||Annual fees||Rewards||Debt||Credit score||Other fees||Fraud protection|
How do you choose the best card?
Choosing the card that’s best is about choosing the one that’s right for you. Assess your financial situation and determine your needs: do you fly often? Do some credit card rewards directly benefit your frequent activities? Do you need a strong credit rating for later investments? If these things apply to you, then a credit card may be the best choice.
Understanding the drawbacks and positives of both debit and credit cards will help you to make a more informed financial decision about the kind of card you need. Hopefully alongside this post you can assess your financial situation and approach this serious decision wisely.