The difference between credit cards and debit cards
While credit cards and debit cards look the same, they have some big differences. It is important to understand them when deciding what your first card should be.
The main difference is that credit cards allow you to borrow money from the issuer, typically a bank or lender. Debit cards allow you to spend money by withdrawing funds directly from your bank account.
Pros of a Credit Card
There are several positives to having a credit card. You can get rewards, travel points, there are fraud benefits, and you build credit.
- Rewards + Travel Points: You can get cash, discounts, gift cards, merchandise, and other rewards with a credit card. You can also get travel points through the reward system. You can use your travel rewards to help you travel on a budget.
- Fraud Benefits: With the Fair Credit Billing act you can get fully refunded for unauthorized purchases, goods that are damaged, or items that are lost in shipping. In cases of fraud on your credit card the bank loses money because you borrow money from the bank when you use your credit card. If there is fraud on a debit card you lose your own money and must wait for the bank to credit it back to you. So, your money is more protected from fraud with a credit card.
- Helps Build Credit: Paying your bill on time and keeping your balances low can help build a good credit score. Your credit score is needed in the future when you are applying for an apartment or a loan.
Cons of a Credit Card
The downsides of having a credit card are that too much spending can lead to debt, there are fees, and it can also negatively impact your credit score.
- Spending too much can lead to debt: Because you are spending the bank’s money and not your own it has to be repaid with interest. Racking up a high credit card bill can become difficult to pay back, especially if you just make the minimum payment and continue to carry a balance.
- There are fees: There are several fees attached to a credit card besides an annual fee. Basic cards have little to no annual fee but it’s still important to know the cards’ international transaction fee, balance transfer fee, and late payment fee. You should also be aware of your card’s annual percentage rate (APR). This is the interest rate of carrying your unpaid balance month to month. Each card is different so be sure to check with your bank on your specific fees.
Pros of a Debit Card
Debit cards are the modern-day check, you can only spend the amount of money in your account. This can help you avoid potential debt and even save money.
- Uses the money in your bank account: A debit card is a direct pipeline to your money. You have direct and easy access to the money that has been deposited into your bank account.
- You can avoid debt: Because you are spending your own money and the funds are coming directly from your bank account it is impossible to overspend. But you can reach $0 and have to deposit more money into your account.
- You can save money: Some banks offer a tool to help you save your money called RoundUp. RoundUp rounds each debit card purchase to the nearest dollar and transfers the difference to your savings account. This helps contribute to your savings with every purchase.
Cons of a Debit Card
The down sides of a debit card are that you aren’t building credit, and there are a few fees.
- You aren’t building credit: Building credit means showing to lenders that you can repay the money that you borrow. A debit card doesn’t report to the major credit bureaus. So, using a debit card alone won’t help you build a credit history.
- There are Fees: Debit cards might have some fees such as maintenance fees, overdraft fees, returned item fees and foreign atm fees. Be sure to check with your bank on your specific fees and make sure to know when they occur so they don’t catch you off guard.
Which one is right for me?
It depends on what you are looking for. Credit cards and debit cards may seem similar but as you can tell are very different. If building credit and receiving rewards or extra points are what you’re looking for, a credit card is for you. If you’re looking for an easier way to spend money directly from your bank account, a debit card is the perfect way to do that. There are benefits and drawbacks to both, so it is important to think “what is the best fit for me?”