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People often ask me, “What’s the difference between a debit and credit card?”
Simply put, a debit card is a use now, pay now card, while a credit card is a use now, pay later card. These are the main differences, but both can definitely serve their own purpose in different situations.
I’ll break down both merchant card types to give you a better understanding of each.
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Debit: What is it?
A debit card is a card issued by banks to customers with checking and savings accounts, but you can also get them through stores or online financial providers.
The Balance details that debit cards replace your cold hard cash or checks with plastic, where the funds are taken directly from the available money in your account.
Additionally, debit cards can also be used online to pay for goods and services. However, some services, like certain airplane tickets are not available to be purchased using debit cards, unless it has a credit card affiliation, such as VISA or Mastercard (which most do).
A feature by US Today claims that this is because some debit cards don’t have the same refund protection if your flight is canceled or the airline goes out of business.
With a debit card it would be the decision of the airline to give you a refund, which they may not do if you haven’t read the terms and conditions.
Pros and Cons of Debit Cards
As debit cards only allows you use the money you have in the account, you get to be more mindful of your spending. The real-time payments facilitated by debit cards can also help you track and budget better, letting you eliminate any unnecessary expenses at the end of the month.
Some debit cards also have a limit on how much you can access in a day. This varies from bank to bank. Most banks offer overdraft programs, which allow you to spend over your debit card balance at the cost of an overdraft fee (which is at an average of $34!).
Additionally, it’s harder to dispute a purchase when you do it with a debit card, as you have less legal protection, which could tie up your funds or even have you end up losing it entirely.
Even worse, debit cards don’t help you with your credit score, and can even bring it down with overdraft fees, so remember to be wary if your goal is to build credit.
Credit: What is it?
A credit card, like a debit card, also allows you to buy items or services — but unlike debit cards, you aren’t using the money you already have. Instead, funds are issued by a lender via a credit line.
A post by Petal Card entitled ‘Credit vs. Debit: What is the Difference?’ explains how this allows users to spend more money they have in their bank account, which is needed for big life transitions like moving home. Crucially, credit cards offer more consumer protection.
A notable example: They allow you to legally dispute transactions, like a defective product you bought, without tying up your money.
Pros and Cons of Credit Cards
Credit cards are called debt instruments because they put you in debt. While it may seem unwise to get one, Business Insider points out in a feature on credit card use that there are benefits to using a credit card.
The biggest benefit is that your subsequent repayments (on time, and complete) will help you build up your credit score.
A high credit score (upwards of 650), in turn, will come in handy should you ever want to rent an apartment, own a home, take out a business or personal loan, or buy a car.
However as credit cards are debt instruments, they can put you deep in debt in no time if you are not organized with your finances.
Access to funds you don’t have is an invitation to overspend, often without foresight on how much you can actually pay back.
This is the biggest drawback to having a credit card, especially if you haven’t developed good financial and spending habits.
It also compromises your credit utilization score, which I discussed in this post.
Before you know it, you’re making late payments (or missing them completely) and accruing more and more interest. The cycle goes on and on, until your expenses are far beyond your ability to repay them.
A good knowledge of debit and credit cards will help you take control of your finances since you now know how to use both, as well as the things you’ll need to watch out for.
But that being said, there is another important component to getting your finances in order: spending wisely.
Whether you have one or the other, or both, you’ll have to be mindful of the products and services you buy, especially as most cards are now contactless making it easier to overspend.
It is so easy to spend money to don’t have or can’t afford to lose. Knowing when it is best to use your debit and credit cards will reduce any chance of making serious financial mistakes.
I’ve done all the things! Girl, I’ve washed my face. I’ve trashed everything that doesn’t spark joy. I’ve walked the baby steps. I’ve cried. I’ve prayed, but my perfectionism has really held me back.
Perfection Hangover can be crippling. Stop comparing yourself to others and start living your best life! That’s why PH exists! I want to encourage you to take control of your money, your blog, and your business.