Debit vs credit cards.
Which one to use?
What is the difference between debit and credit cards? They look alike – have the same number of digits, may be branded with the same payment system logo; but the basic difference between debit and credit cards is whose money you are spending. Is it your money or the bank’s money?
Either way, there’s a price for whatever you chose, whether from lost interest or from fees and interest charges on a credit card. We’ll look at each type so we can be able to see the differences and similarities where they exist.
Let’s look at both in some detail.
Both debit and credit cards allow you to make purchases and also to withdraw cash. Many debit cards, like credit cards are issued on one of the major payment system brands- Visa or MasterCard. Both types allow you to do transactions in person or online in the same way you would use a credit card. You cannot usually use Debit cards not branded Visa or MasterCard to make online transactions, however, cardholders may make purchases in stores and can get cash at ATMs in your local networks.
Debit cards allow you to use funds saved by you in a savings or current account at a bank or credit union. You are able to access your funds electronically and immediately. Your balance is reduced by the amount you use.
Credit cards are borrowed money (even if they are secured). A lender/issuer gives you a line of credit that you access by using the card. You do not have to have an account or savings with the issuer. The credit is provided to you based on an agreed set of rules –the cardholder agreement– that includes the price you will pay for the loan.
Debit card costs may include account maintenance fees and a small transaction fee each time the card is used. However, most times, banks give savers options so that these charges are not applied. Most banks give at least some free transactions each month. So depending on the type of account, there is potentially no fee for using your debit card, except for when you use it at a location not supported by your bank. There are no interest charges on your purchases from a debit card, because you are using your money.
Credit card fees usually include (and may not be limited to) a joining and annual fee, over-limit fees if you spend more than the assigned limit. Late fees are applied if the bill isn’t paid on time and interest charges if you do not pay back in full by the due date. Some fees like annual fees are unavoidable, unless you have a no annual fee card, but you can avoid interest charges. However, interest charges are a reality for most persons because they have a credit card so they can spend more than they earn. Read more on the blog for how to best manage this.
With a debit card, you can only use what you put into your account. Your transaction will be declined if you have no money unless you have an overdraft arrangement with your bank. Of course, fees/interest for those funds will be applied because you are no longer using your funds. The difference between using a credit card and an overdraft amount on your debit card is that you have the option of paying off the credit card by due date and paying no interest. However, interest charges and fees on overdraft facilities usually cannot be avoided.
Credit card limits are often several times the monthly income of the user (unless you are new to credit or have bad credit) and can be used in case of emergency. Note: Do not confuse using your card in case of emergency with your emergency savings- your emergency savings is where you are going to take the funds from to pay back the card you used in the emergency situation.
Funds defrauded from an account linked to a debit card is usually refunded once the bank confirms you did not use the funds. However, you may be inconvenienced during the wait time to have the funds restored. Some banks are getting better at quick refunds once the fraud is reported, but not all respond in the same way.
However, funds in savings and current accounts are insured up to certain amounts. So in the event of loss, the account holder is guaranteed, at a minimum, up to the amount insured.
Credit cards usually have more robust fraud monitoring and refund policies in place. These allow for quick restoration of available balance, in some cases as soon as the matter is reported.
Credit card holders can earn rewards and incentives and have the option of repaying over a longer period (interest charges will apply). The value added offers such as insurance, can add up to give users great savings. However, always remember these come at the cost of high interest rates and fees unless you area savvy user.
So, which one to use?
The decision about which to use depends on you; let the situation help you determine. You have the power of choice. If you mindfully do the best you can, then it is a step in the right direction. A step in the right direction is better than mindless action. If you do not manage your finances well, and know you will overspend, the limitations of a debit card may serve you well until you can improve your situation. A credit card is potentially more rewarding, but also much more risky.
Assess your financial situation and do what’s best for you. Ultimately, it’s about you making the best of your life.
Live richly. Spend Wisely.