They may look identical, but they function in very different ways. Have you ever wondered what are the pros and cons? You’ve come to the right place. Here’s the breakdown of this decade’s battle of credit cards vs debit cards.
Both might look similar and generally have 16 (in some cases 15) numbers, expiration dates, EMV chips & magnetic strips. These two cards became revolutionary when they hit the market as they are easy to use and extremely convenient for purchases made both online and in stores.
There’s a key difference between them. But before we dive into the differences between credit cards & debit cards, let’s learn a little about them.
What Is A Credit Card?
These cards are issued by a financial institution, in most cases a bank, which allows the cardholder to borrow funds from that particular institution, for a certain period of time. Cardholders who borrow the funds have an agreement to pay back in a given period of time, and with or without interest, as per the institution’s terms. The cardholder can also choose to convert the sum into installments. Generally, your purchases must be paid in full at the end of a monthly billing cycle, and failure to do so allows the issuing company to charge interest on the remaining balance. This type of debt is unsecured, which usually garners a much higher interest rate than a typical loan.
What Is A Debit Card?
These types of cards allow the cardholder to use them for purchases, the money is deducted directly from their checking account. This means, the cardholder does not loan money from any financial institution but uses their own money. If you don’t have the funds in this case, you can’t make certain purchases. You can view a debit card as a digitized version of cash.
Credit Cards vs Debit Cards
So, coming to the main question: what’s the difference between a credit card and a debit card?
Well, debit cards allow you to make purchases and spend money by drawing funds directly from your bank account. However, credit cards allow you to temporarily borrow funds from the financial institution up to a certain limit.
Here are some key differences between a credit card & a debit card:
- Credit cards help you get a line of credit from a financial institution, typically by a bank. While debit cards don't give you any credit line but allows you to use your funds that you deposited in your bank account.
- Compared with debit cards, which are linked to bank accounts, credit cards have better consumer protections against frauds.
- Today, a lot of credit cards are available in the market that don’t charge any annual fees, while newer debit cards offer credit cards like protection.
- The average transaction value of credit cards is 3 times higher than those of debit cards. Signaling to us that consumers spend more when the purchase isn’t tied to funds they currently have in the bank.
Pros of Credit Cards
Build credit history
Credit cards are excellent for building credit history and they can help you build excellent credit scores. They can help create positive credit history that includes timely payments, low credit utilization ratios, and even negative factors such as missed installments, late repayments, etc. However, when you’re just starting out in adult life, a good credit history can help steer you into financial freedom, later on. In sum, credit cards are a type of debt helping your credit score with your “credit mix” and if you pay on time each month with your payment history and utilization rate, all factors that weigh heavily on a great credit score.
Warranty and purchase protections
Some financial institutions may provide additional warranties and insurance on items you purchase with the cards. These warranties and insurance are in addition to the ones offered by a retailer or a brand. In addition to this credit cards have been attracting millions of customers through benefits like cash back rewards, airline miles, and other free perks and benefits.
When it comes to fraud protection, many credit cards offer much better protection than debit cards. If the consumer reports fraud within 24 hours or as specified by the institution, the consumer can claim a certain amount.
Pros of Debit Cards
A debit card allows you to use your own money by deducting the money directly from your bank account. Hence, avoiding borrowing any funds from the bank. This leads you away from the risk of going into debt, in fact, it eliminates the possibility of taking on high-interest debt. This is the very reason that financial experts recommend individuals with spending problems shift to only using a debit card, to avoid overspending and impulse buys.
Certain debit cards offer fraud protections on any transactions made, given that the cardholder reports a fraud within a specified time frame given by the bank.
No annual fee
Most debit cards today comes with no annual fee. Hence, these cards are suitable for people who don't wish to pay annual maintenance fees.