Debit cards and credit cards may look alike — but they are not the same. They serve different purposes and have different impacts on your finances. That’s why it’s important to know the difference between debit cards and credit cards explained.
If you’ve ever wondered about the differences and want to understand debit and credit cards, this article is for you. you’ll learn the difference between debit cards and credit cards, the advantages of each one, and how to choose the best option for you.
What is a debit card?
In order to understand the difference between debit cards and credit cards, let’s start describing what each one is, their main features, and how they work.
A debit card is a card used to make payments with funds from your bank account. Since debit cards allow you to draw money from your bank account, you need to have money at the bank — in your checking account or savings account — in order to make a payment.
Standard debit cards require you to have a checking or savings account to draw money from. However, there are two other types of debit cards that don’t have that requirement: prepaid debit cards and electronic benefits transfer (EBT) cards.
Prepaid debit cards can be loaded with funds beforehand. Those funds will remain available in the card for you to use. Since the funds are preloaded, they don’t require a bank account.
EBT cards, on the other hand, are made available for people who receive benefits from the government. With an EBT card, the beneficiary can make purchases using funds given by the government.
What is a credit card?
A credit card is a card that allows you to borrow money from an institution and pay it off in the next month or cycle. Since they are a type of credit line, in order to get a credit card, you need to apply for it and go through an analysis by the institution.
The amount available for you to spend is determined according to specific requirements that can vary from one institution to another. Generally, to determine your credit limit, they take into consideration your income, credit score, financial history, and previous relationship with the institution.
Advantages of a debit card
Now that we know the difference between debit cards and credit cards, let’s get into some of the upsides and downsides of each. Starting with the advantages of using a debit card.
Debit cards don’t have many of the expenses and fees that credit cards have, such as overdraft fees, annual fees, late payment fees or interest, and fees for withdrawals. However, some prepaid debit cards can have usage fees and other costs to counterbalance the convenience of them not requiring a bank account.
Debit cards are usually the chosen option by more frugal consumers. In addition to not having fees, some people find it easier to save money with a debit card because funds are debited instantly — different from credit cards, where you pay on the following cycle.
Since debit cards draw on money you already have, they don’t come with the danger of accumulating debt. By using a debit card, you avoid the temptation of spending more than you can afford.
Debit cards are also an accessible option for most people, even if they don’t have a bank account. Because there is no credit check, you don’t need a good credit score to get a debit card.
Downsides of a debit card
There are also downsides regarding credit impact because debit cards don’t require signing up for a line of credit. A debit card won’t help you build a credit history, thus not contributing to improve your credit score.
By using a debit card, you don’t have any rewards commonly found on credit cards such as: you won’t earn any points, miles, or cashback on purchases or payments. This means if you only use a debit card, you’ll miss out on saving money and even earning money.
Advantages of a credit card
Credit cards often offer perks that can be interesting to a lot of consumers. Most credit cards offer miles, points, cash back, and some even offer discounts on specific purchases paid with credit cards.
Contrary to popular belief, credit cards can be a great tool to keep track of your finances: when you have all your purchases and expenses in one place, it can be easier to have a clear picture of your finances.
Another advantage of credit cards is the ability to improve your credit score when used wisely. Since it’s a line of credit, your credit card usage helps build your credit history — this means that if you always repay it on time, it can boost your credit score.
Downsides of a credit card
The same way that credit cards can boost your credit score, they can also hurt them, depending on how you use and repay them. If you repay it late, max out your limit or constantly ask for new credit cards, your score will take a hit.
Another common trap of credit cards is the illusion of “free money”. Since it allows you to spend first and pay later, you might be tempted to spend more than you can pay. However, everything you spend must be paid off, sometimes with interest.
Interest and fees are another downside of credit cards. From annual fees to overdraft fees, withdrawal fees and late payment fees, there are various costs of using credit cards. Not everything is lost: newer credit cards can offer lower fees or none at all, making them more accessible to more people.
Using credit the smart way
Most people need credit at some point. In these situations, it’s important to know how to use credit the smart way. And now that we know the difference between debit cards and credit cards explained, you are more empowered to make better financial decisions.
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Unexpected things happen more often than we would like them to. That’s why OneBlinc is here to help, whether you have an emergency or just need that extra cash to go through the end of the month. We believe in people, and we understand that everyone might need money someday, somehow.