Differences between debit cards and credit cards

Cards are the financial instruments issued by financial institutes like banks or credit unions. Modern world citizens are widely acquainted with using bank cards like debit cards, credit cards, ATM cards, etc. To rip out the maximum benefits out of these cards, their concept, key attributes, differences of one from others, etc., should be clear to all.

What’s a debit card?

A debit card is a financial instrument issued by banks against the checking accounts of their customers. Debit cards enable the users to utilize the money deposited in their bank accounts at ATMs, POS terminals, e-commerce websites, etc. Debit cards are only workable when there is a sufficient amount of money in the bank’s linked checking accounts.

What’s a credit card?

A credit card is another financial instrument of any bank or credit union that allows the cardholder to utilize a borrowed fund. Banks allocate a specific credit limit to the card for its holder. The cardholder can use this limit uninterruptedly until exhaustion to make a purchase of goods at POS terminals. Even in e-commerce transactions or online shopping, credit cards can be used. However, if the due card bills are not cleared on due date, it can harm the credit rating.

Differences between debit and credit cards

Besides some similarities, some major differences help to choose whether to get a debit card or credit card. The significant distinctions are brought to the discussion here.

Differences in the Source of Funds

The primary difference between debit and credit cards is the fund’s source by which the cards are backed financially. In debit cards, the money is being pulled from the linked checking account of the customer. If no sufficient cash is available in there, the card transaction will not be executed. On the other hand, credit cards have an allotment of certain credit limits. When a cardholder uses his credit card, he borrows a portion of that limit from the issuer bank. Eventually, he has to pay the debt plus the interest, if any, back to the bank. Hence, a debit card is a non-debt instrument, and a credit card is a debt instrument.

Bank Statement and No Obligation of Payments

Banks do not send a statement for debit cards; instead, prepare a linked checking account statement. These statements are prepared to cover a year, six months, or a quarter. Contrarily, credit card statements are generated every month. Each of the months is a billing cycle, and the cardholder must pay the outstanding amount within the due date, which is usually fifteen days later than the stated date. Mentionable that debit cards do not require any obligated payments, whereas credit cardholder must clear their dues within a stipulated time.

Differences in the Costs of the cards

Maintaining a debit card is not very costly. One has to bear the annual card fee and charge for the regeneration of lost PIN, which is very nominal. Obstinately, carrying a credit card will cause someone to pay a variety of fees. Those are annual card fee, notification fee, check processing fee, balance transfer fee, cash withdrawal fee, the excess over-limit fee, etc. Moreover, using a debit card does not result in an obligation to pay any interest for the used fund as the customer is spending his own money. But credit cardholders spend the bank’s money, and the bank charges a high amount of interest on that fund, usually 10%-14% APR.

In terms of the Benefits received by the card holders

Credit card holders get a lot of benefits and privileges due to their possession of the cards. Banks reward the cardholder with points that can be accumulated on the card. The card owner can redeem these reward points to make payment of outstanding bills. They can also use these to get gift vouchers at renowned stores. Using credit cards also pays off with attractive cashback promotions on spending, winning vacations, and even shopping cards at selected stores. On the other hand, debit card users get only a limited amount of cash-back, but no reward points or the winning of luxury vacations. Credit cardholders enjoy top-notch lounge facilities at airports, and debit card users are not offered with the facility.

Opportunity to Build Credit History

Credit cardholders get an opportunity to build a credit history for pursuing any future loan of many serious weights. Using credit cards on a specific interval and repaying the debt on a timely basis leads to create an impressive and trustworthy history for the borrower. But a debit card user never gets any effect from his card usage since he is spending his own money. There is nothing to report to the credit bureau, so it will not affect his credit history.

Equal Monthly Payment Facility

Purchases with a credit card allow customers to pay off the amount in EMIs. But when bought with a debit card, the item’s price has already been paid in full. So nothing left to spend on installments.

For example, two friends Richard and Harold went to buy two sets of earpod at $200 each. Richard paid with his debit card from his checking account. But Harold did not have enough money in the bank account to complete the transaction. He used his credit card and paid the product price to the merchant. Later, Harold contacted his bank and transferred the transaction amount to the bank’s EMI scheme. Then he did not have to pay the whole money in the very next month. He would pay $17 each month for the next 12 months, and Richard had to pay the whole $200 instantly.

Protection against illegal activities

For protection against fraudulent financial activities or identity theft, credit cards are more effective than debit cards. If someone’s card is lost or stolen, s/he must report the situation immediately to his/her bank. Most of the banks have their own 24/7 hotline to serve these kinds of purposes. Once registered on the lost/stolen card, the user will not be liable for any further usage of the card.

If the lost card is used before reporting, the liability will vary depending on how fast the user has reported on the matter. The debit cardholder will have to bear up to $50 if he reports a lost card within two business days, up to $500 if reports after two business days but before 60 calendar days, and the whole amount if reports after 60 calendar days. But as per the Fair Credit Billing Act, credit cardholders will only be liable for up to $50.

Shape in Spending Behavior 

Debit card is beneficial for money management plans. Its users learn to spend according to his earning. Since a debit card does not allow over usage of money the customer has in the account, he remains cautious about acting accordingly. Using credit cards in an unplanned way may lead a person to a massive pile of credit card debt burden in no time. If someone spends with his credit card and pays even only the minimum amount, outstanding debt will increase in compounding principle.

For example, Audrey wants to take a vacation to Paris but has only $2,000 in her account. She estimated that this trip would cost her at least $4,000. So, she decides to take the vacation later. But Neil wants to get a laptop of $1,000 with his $1,500 credit card limit. He plans to pay only the minimum amount of $50 in the next month. His bank will charge interest on the remaining outstanding amount, and the debt will stand at $958 in the next month, at $948 in the following month, and it will continue. Till the whole amount is settled, Neil would have paid a considerable chunk as interest.

Bottom Line

Differences between debit cards and credit cards are confusing since both types of cards are accepted in similar kinds of places. Proper knowledge regarding the distinctions is necessary to avoid any financial disruptions. Though debit and credit cards can be used for the same purpose, in the same way, the consequences of both are not the same.