Debit cards vs credit cards

Debit cards draw money from your bank account, credit cards allow you to borrow and repay later. Debit cards vs credit cards

Debit card Vs Credit card
  • In this short 5 minutes article
  • Avoiding debt
  • How to get best credit cards for better credit history

Debit cards work very much like credit cards, but with significant differences.

What is a debit card?

A debit card withdraws money directly from your checking account when you use it to make a purchase. You can view it as a plastic check. If you don’t have enough money in your checking account to cover the purchase, the transaction is declined.

The transaction is immediate and you don’t have to pay interest. You can use debit cards to withdraw money at ATM machines.

 

What is a credit card?

When you use a credit card, you essentially borrow the money which you will pay later. When you use a credit card, you agree to pay back the money according to the credit card agreement you accepted which includes charging you interest.

Credit cards have limits. This is the maximum amount you can borrow before you cannot charge it anymore. Your payments affect your credit history positively if you pay on time and affect you negatively if you make payments late.

 

What is a prepaid card?

This are cards that you preload money on. You can then spend this money in the same way you would with a debit card. Once you use it all up, you cannot use it again. You can read more about prepaid cards from the Consumer Financial Protection Bureau. Prepaid cards are very different from credit cards. 

All three types of cards above may have the same logos like Visa, Mastercard, American Express, Discover or more. 

 

 

Read: 4 Tips on how to avoid debt

Advantages of using a debit card

 

 

  • The main benefit is debit cards help to avoid getting into debt. Credit card interest charges are sometimes very high and very expensive. Debit cards will help avoid the pitfalls of poor credit management. They, however, do not help build a good credit history.
  • Help avoid overspending. You can only spend the available amount in your checking account. 

 

Carrying a balance month to month on a credit card and paying minimum balances is very expensive. Credit card interest charges are sometimes very high and very expensive.  Credit cards may have a lot of fees associated with use. 

 

Advantages of using credit cards

  •  Help build a good credit history. Your repayment is reported to the three main credit reference bureaus. Experian, Equifax, and Transunion. Good repayment, like on-time payments and reduced balance help, boost your credit history
  •  Better fraud protection. The Fair Credit Billing Act protects you from unauthorized charges. Liability is limited to $50 for unauthorized charges. Some credit card companies have $0 liability policies if your card is lost or stolen.
  • Earn rewards. Credit card companies usually offer promotions. They are in a very competitive business. Rewards such as cashback on purchases and travel rewards. Some offer points. You can redeem the points at some stores or airline miles
  • No interest borrowing for a month. Most start charging interest after one month of carrying a balance. If you pay off entire balance month to month, you essentially get free short term financing
  • Emergencies. Your car may break down and you need a tow immediately. Such emergencies can be covered quickly

 

How to get started with the best credit cards

Credit card companies will check your credit report to determine how much credit to extend. Make sure to check your credit report before applying.