It is not a surprise that you get confused distinguishing between a debit card and a credit card. It is easy to get confused between the two cards as they look identical and have a 16-digit card number, a magnetic strip and an EMV chip.
Both credit cards and debit cards make it convenient to use funds and reduce the need to carry cash. They provide protection which is second to none but comes with substantial differences that may affect your capital. So, we will be discussing the differences in detail later in this article.
Credit Cards vs Debit Cards
Here is an in-depth explanation from scratch to solve all your queries and confusion regarding credit and debit cards. Let’s get started!
What is a Credit Card?
A credit card is a card which is issued by a monetary institution which is generally a bank. It allows the cardholders to borrow money from the bank, which they need to pay back with interest and is charged according to the terms of the bank.
To get a credit card, you must submit an application which contains your personal information like your name, social security number, occupational class, income, address, and whether you own or rent your home. Then the bank issuing the card will go through your application, credit score and credit profile to check whether you fall under the criteria to be given the card.
If the issuer is satisfied with your credit score and profile, they will grant you a line of credit. Otherwise, they will reject your application. If your application gets denied, then the issuer will send you a letter which will have the information as to why your application was denied. On the other hand, if your application is approved, then you can use the card to make payments up to the credit limit which is granted on the card.
Credit cards are classified into the following categories:
- Standard Cards – Standard credit cards increase the line of credit for their users to make payments, currency advances, and balance transfers, and they generally have no annual expense.
- Balance Transfer Cards – Balance transfer cards have low commencing interest rates and expenses on balance transfers from another credit card.
- Charge Cards – Charge cards have no pre-set spending limit, and they require payment in full when the statement is issued.
- Secured Credit Cards – Secured credit cards are a particular type of card that requires an initial deposit from the cardholder as collateral.
- Premium Cards – Premium Cards provide benefits such as access to special affairs, airport lounge vestibule, concierge services and many more, but they naturally have higher annual fees.
- Reward Cards – Reward cards offer you rental car discounts, cash back, and travel points to the cardholders, depending upon their expenditure.
How do Credit Cards work?
Once your application is approved, you will be provided with a credit card. You will be charged every month for the acquisitions with a payment due date. The fees could be done in full or make the minimum monthly payment documented on the invoice.
In case you are unable to pay the bills every month, then an interest, set by the card issuer bank, would be charged over the remaining balance, and if you fail to pay the bills by the payment deadline, then you may have to pay a late payment fee. If your credit is due for more than 60 days, then you may also have to pay a penalty rate which is even higher than the initial interest rate for the particular account. Ultimately, after all these repayment and borrowing activities, your credit score is calculated.
What is a Debit Card?
A debit card is physically identical to a credit card, but it is very different from one. Debit cards are provided by the banks in which you have an account. Rather than borrowing, it acts on the principle of withdrawing funds from your checking or savings account. When you make a payment using a debit card, it withdraws money from your account to complete the payment.
Usually, all the banks and credit unions provide their customers with a debit card which is linked to their account. Also, no annual fees or interest is charged with a debit card. A debit card provides the amenity of credit and other similar customer protections when offered by a primary payment processor such as Visa. In addition to standard debit cards, two types of debit cards need no checking or savings account, and they are:
- Standard Debit Card – Standard debit card is a card issued by the bank, and it simply withdraws money from your bank account.
- EBT Card – Electronic Benefits Transfer card is issued by state and federal organizations to qualified users to enjoy the benefits of making payments.
- Prepaid Debit Card – Prepaid debit card allows a user with no access to a bank account to make electronic payments up to a limit with which the card is recharged.
How do Debit Cards work?
A debit card is a card which is linked to your account. It may look similar to a credit card but it functions very differently. The money you can spend using a debit card is limited to the money you have in your bank account. It is not possible to borrow money using a debit card.
It is not possible to go into debt when you use a debit card as you aren’t borrowing any money from anywhere. Rather, you are spending the money you already have. It is also not necessary to make any minimum monthly payment with a debit card as there is no debt to pay. A debit card can also be used to withdraw money from an ATM, and it could also be used to make payments the same as a credit card.
Pros and Cons of Using a Credit Card
Credit cards offer several advantages over debit cards but it also comes with some drawbacks. Let us dive deep into the benefits of credit cards and disadvantages of credit cards.
Pros of Using a Credit Card
- Fraud Protection – Credit cards offer fraud protection to its users. If you register fraud, theft or loss promptly, the maximum penalty for purchases made after the card disappears is $50. The Electronic Fraud Transfer Act provides debit card users with the same security, but only if they report the fraud within 48 hours. After that, the cardholder’s penalty rises to $500, and after 60 days, there is no limit.
- Fabricates Credit History – Every time the credit card is used, a report is fabricated, constituting both positive and negative history. The positive history contains timely payments and a low credit usage ratio, while the adverse history contains late payments and tardiness. It is then used to fabricate a credit score. Maintaining a good credit score is wise as a good credit score offers multiple benefits.
- Insurance and Purchase Protection – Another benefit of having a credit card is that some credit cards provide you with extra warranties on the purchased items. This means additional insurance is provided on top of the offers provided by the brand. Moreover, if that product is being sold at a lower price somewhere, then you may get a refund of the price difference between the price you paid and the price at which it is being sold somewhere. Also, if your product gets damaged and the manufacturer’s warranty has lapsed, then you may check with your credit card company whether the damage will be covered or not.
Cons of Using a Credit Card
- Debt – When you spend money using a debit card, you are borrowing money from the bank, which needs to be paid back. And it should be refunded with an interest set by the issuer bank. If you keep spending money without clearing your balances monthly, then it may stack your dues and lead to debt.
- Interest and Fees – As you are borrowing money from the bank, it needs to be refunded with interest. Using a credit card is simply taking a momentary loan from the bank, and if the payments are not cleared in time, then interest gets stacked up, leading to a higher APR, and a higher APR means it is more difficult to carry a balance each month. Another thing to keep in mind is that the better benefits your card provides, the higher the annual fees will be. So, you must know the charges of your card; if it charges annual fees, cash advance fees, late payment fees, balance transfer fees or returned payment fees.
- Impact on Credit Score – If you make it a habit to pay late, have a high balance on the card or have stacked dues, then it may have a negative impact on your credit score, which will keep increasing the interest rates. On the other hand, if you pay your bills on time, have a low balance on your credit card and have no stacked dues, then it will improve your credit score and keep your interest rates within the limit.
Pros and Cons of Using a Debit Card
There are several advantages of debit cards over credit cards, but it also comes with some drawbacks. Let us now review them in detail.
Pros of Using a Debit Card
- Fraud Protection – Earlier, credit cards could provide better fraud protection but now, some debit cards are providing far better protection than credit cards. It all comes to a singular point, which is time. The longer you take to report an unauthorized payment, the more you have to pay as a penalty. Moreover, if you take a more extended period, then you may be responsible for the losses.
- Sidestep Debt – Debit cards help you to avoid debts as you will be spending the money which you already have, and you won’t be borrowing any money. So, there is no chance of debt like credit cards as they borrow money on which they have to pay interest, and in case of any monthly balance, the interest gets increased. So, you can sidestep the debt by using a debit card.
- No Annual Fees – As many credit cards charge an annual fee, it may become expensive to hold onto one. On the other hand, debit cards have no annual fees and don’t charge any money on withdrawal from your bank’s ATM.
Cons of Using a Debit Card
- Fees – Although debit cards don’t have annual fees, you may have to pay an additional fee to maintain your checking account. It may be monthly maintenance fees, foreign ATM fees and overdraft fees.
- Nil Rewards – If you complete a payment, you may earn points or cash back if you use a credit card or if you have a rewards checking account. But if you use a debit card, you won’t be able to get these awards on the payments you make.
- No Fabrication of Credit – When you have a good credit history, you can use it to borrow money and raise funds, as it indicates that you can responsibly repay your loans. But if you only use a debit card, then you lose that opportunity. So, using only a debit card isn’t wise.
Get a Visa Debit Card for your Cheqly Business Account
We have established that both debit cards and credit cards are used for payments, but both provide very different benefits. Debit cards use the money you have in your account, while credit cards borrow money from the banks. Debit cards have no annual fees and you will have to pay no interest, while on the other hand, credit card users have to pay yearly fees and interest on the payments they have made.
For all these elements, you must have a trusted platform like Cheqly that helps you to effectively manage your money. Cheqly helps you to open a business account for your company and offers physical and virtual VISA debit cards which are issued immediately – apply for a Cheqly Business Account now.