Most of you likely have a Debit card AND a Credit card in your wallet… but do you know the difference between these similar pieces of plastic? While there are certainly reasons to have both, there are also instances where one may provide distinct advantages depending on your financial needs.
Let’s start with Debit cards. Every time you make a purchase with a Debit card, the payment will be withdrawn from your checking account at your bank. Debit cards can also be used to withdraw funds from an ATM, though you’ll likely incur a fee for withdrawing funds from an ATM not affiliated with your personal bank.
There are two main types of Debit card options: the standard option (a Card that connects directly to your bank account) and a prepaid option (for those without a bank account). The prepaid option is a great choice for those who don’t want to open a bank account but have the ability to load the card (similar to loading a gift card) so that future purchases are more convenient.
Why might someone prefer using a Debit card to a Credit card?
For one, they’re generally free of fees. Unlike Credit cards, which typically have an upfront fee and/or high interest rate, Debit cards don’t require any upfront or maintenance costs. Another perk? Debit cards provide an added layer of security through the PIN feature. In order to make a purchase or cash withdrawal with a Debit card, the user will be prompted to enter the 4-digit PIN associated with the account. Credit cards don’t contain any security passcodes or PIN identifiers. Finally, Debit cards are helpful for those who are looking to control their spending habits. With a Debit card, you can’t spend money you don’t have.
Credit cards, on the other hand, provide users with a line of credit that they can then use towards future purchases. There are four main kinds of Credit card options: the standard option you’re likely most familiar with, the “rewards” option (allowing for the accumulation and redemption of various points/cash back), a secured option (a prepaid card available to those who are looking to establish good credit history), and a charge option (which mostly functions like a typical Credit card, though does not allow you to carry a balance from month to month).
Most consumers enjoy using Credit cards because of the spending flexibility they provide. Credit cards allow consumers the ability to make a purchase, and pay off the balance on a periodic basis that works for their budgets. This flexibility is extremely convenient, but comes at a high price. Interest rates (often called ‘Annual Percentage Rates’ or APR) for Credit cards are among the highest rates you’ll find. So yes, while Credit cards do not require you to fully pay off your balance each month (though it will save you money to do so), they do charge you a penalty fee in the form of high interest applied to a remaining unpaid balance. This can lead consumers down a dangerous path of spending beyond their means and accumulating consumer debt they definitely weren’t planning for. If you have a history of erratic spending behavior and/or inability to make the minimum payments on your debts, you’ll want to think long and hard before applying for a Credit card.
That said, Credit cards offer some key benefits that Debit cards do not:
- If you have a rewards card, you’ll be able to earn some reward (depending on the card) as a result of your spending. Debit cards do not offer a rewards system. (For a list of the best credit card offers of 2020, check out this post here!).
- Credit cards offer a way to demonstrate and establish good credit history. Purchasing a secured Credit card can be a great way for beginners with no history to establish a track record of responsible spending and making payments. Other standard and rewards cards also allow consumers to build credit and demonstrate good and responsible spending behaviors to credit monitoring agencies.
- Credit cards offer some protection to consumers if cards are stolen or lost. Rarely will you be held liable for fraudulent activity and in the rare chance that you are, the general maximum liability is $50. Not the case with Debit cards. If the card is stolen and used, that money is immediately removed from your bank account. In this instance, it would be wise to report the fraud and stolen card as soon as possible. If you wait to report the instance, you may stand to be unable to recoup the losses.
While both Credit and Debit cards offer advantages to consumers, determining which one best suits your needs largely depends on your financial needs and overall situation. Before opening any account, it is highly recommended that you meet with a financial professional who can assist you in discovering the best option for your individual circumstance.
For a helpful analysis of current credit card offers, check out this helpful breakdown.
Leave a Reply