myPOS blog Tips

The difference between a credit card and a debit card

Credit and debit cards usually look almost identical. They have a 16-digit number, an expiration date, contain the cardholder’s name, and also feature a chip and a magstripe. Also, they’re protected by a Personal Identification Number (PIN) code. Both types of cards can make it easy and convenient to make purchases at a physical or online store.

The convenience and protection they offer are always effective, but what is the difference between a credit card and a debit card that could significantly affect your finances? Here’s how to decide which card will suit your needs.

What is the difference between credit and debit cards?

Although they look almost identical, debit and credit cards have significant differences that you should know about. You can withdraw cash with both types of cards, called cash advances for credit card withdrawals, but credit cards charge interest because you are essentially borrowing money from the bank and are expected to repay this amount at a later stage.

Also, credit cards help you build and extend your credit history, which is a statement of your work with resources that do not belong to you, but to your bank. With a debit card, on the other hand, you pay or withdraw cash using funds you actually own.

In addition, credit cards may be more suitable for larger purchases, although the amount will be carried over to your statements for next month, in addition to credit card interest rates.

Conversely, debit cards do not issue statements. You will receive your report only at the end of the month, and you can see the opening balance, followed by the number of purchases and ATM withdrawals you have made during the period.

What is a credit card?

Credit card payment

A credit card is a means of payment issued by a financial institution, usually a bank. It allows the cardholder to borrow funds while using it, provided that the cardholders agree to return the money with interest, according to the rules of the institution.

Credit card users can not only withdraw funds but also use discounts, travel points, and many other benefits not available to debit cardholders. They can apply prizes for fixed or differentiated rates. For example, you may have a card that offers an accumulation of bonus points to book future trips abroad.

Advantages and disadvantages of credit cards

Credit cards give you extra control over paying for purchases. At the end of each month, you will receive a statement stating how much you owe for purchases made in the last 30 days. Depending on when you made your purchase, you have up to a few weeks to pay a portion of the amount due on your credit card. Technically, you are required to pay only the minimum fee each month to keep the card operational.

This type of payment, however, would lead to more debt. For example, if you spend 1,000 GBP for a month, but pay only the monthly fee on the card, and spend the same amount again in the next month, you will probably fall into the debt trap. Each month, when you do not pay the entire bill you owe, there will be a certain amount charged for interest. A useful tip is to pay off your debt as quickly as possible to avoid accruing high-interest rates.

Using a credit card builds your credit history. Every time you buy something with your credit card and then pay it on time, your credit history will be enriched. Building an excellent credit history is important when you are about to take out a loan to buy a car or a home. Paying the amount due on your credit card will show that you can repay your debt and can be trusted.

Having a credit card is very useful for emergencies, for example, if you have to pay extra for repairs in your home. In this case, these costs are unforeseen and the institution that issued your credit card will provide you with a loan that they expect you to repay at the end of the monthly reporting period. Again, this gives you time to react and the ability to deal with emergencies.

What is a debit card?

Payment online with debit card

A debit card makes payments using funds directly from the consumer’s current account and not through a bank loan. Debit cards offer convenience and protection similar to credit cards. In most cases, large payment network companies such as Visa or Mastercard issue them.

If you do not have access to a bank account, prepaid cards provide you with a way to make e-purchases up to the amount that’s pre-loaded on the card.

Thrifty users may prefer to use debit cards, as the service usually has little or no fees unless the user uses more funds than he has in his account and/or uses an overdraft facility. This does not apply to prepaid cards, which often charge activation and usage fees, among other costs.

In contrast, the use of credit cards usually leads to the accrual of annual fees, fees for exceeding limits, those for late payment, and an abundance of other penalties, besides the monthly interest on the outstanding balance.

Advantages and disadvantages of debit cards

Using a debit card instead of a credit card is a good way to reduce your chances of accumulating debt. This form of payment limits you within your budget and prevents you from spending all the funds in your current account. If you ever spend more than your account allows, they may charge you additional fees. It is also possible to use an overdraft facility if you have activated this service.

Debit cards give you easy access to your money, and you can use your card to withdraw cash from ATMs. If you prefer cashless payments, then through the card you can pay at contactless card machines or online.

Since the money from the purchase you make with the card is deducted directly from your current account, you do not have to worry that you will accumulate unexpected debt at the end of the month. This also means that you will not have surprising interest rates.

Overall, using a debit card is a great way to control your expenses, just be careful with overdrafts and overdraft fees!

Choosing the right card for your needs

When trying to determine whether to use a credit or debit card, you need to be honest with yourself about your ability to handle credit. If you have spending problems, it is better to use a debit card to prevent the accumulation of debt.

The choice of the card also depends on the purchases you intend to make. Some hotels, for example, make using a debit card inconvenient or completely impossible. They may require utility bills, personal statements, bank payments, or other proof of solvency before accepting your reservation. Also, that way it’s easier to charge extra for any damages on the hotel premises.

Working with a credit card may also be a better option if you want to take advantage of special rewards programs through bonus points. Remember that this system only helps you if you pay the amounts due in full each month.

If you are trying to build a credit history, using your credit card is an excellent step in the right direction. Paying off debts on time will create a good rating and show responsible behavior, which is reported to the credit bureaus and reflected in your credit report.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.

Related posts