Debit Cards vs. Credit Cards: What is the Difference?

Debit cards and credit cards are almost identical, given that they both have expiration dates, EMV chips, 16 numbers, and magnetic strips. Moreover, these cards allow holders to make online purchases easily. However, the cards have one major difference. Debit cards let holders spend money deposited into their bank accounts, while credit cards allow holders to borrow funds from the card issuers to make payments for purchases.

Read this article to learn more about credit cards and debit cards, as well as their pros and cons.

Credit Card Explained

Credit cards are issued by financial institutions such as banks and they allow cardholders to borrow money from those institutions. To receive this card, you must agree to pay the borrowed funds with the stated interest. Here are the various types of credit cards:

Standard cards: Holders of these credit cards mostly use them to make purchases. Note that standard cards do not attract yearly fees.

Premium cards: These cards offer several perks like airport lounge access, concierge services, access to special events, and many more. Their annual fees are relatively high.

Rewards cards: Such cards offer benefits like cash back to holders based on their spending.

Secured cards: To get a secured credit card, you need to make a cash deposit to collateralize borrowed funds.

Charge cards: There are no spending limits on charge cards. However, these cards do not let unpaid balances carry over to the following month.

Pros of Credit Cards

Here are the advantages of holding a credit card:

Build credit history

Every repayment you make is usually recorded on your credit report. This means if you repay your loan on time, you are likely to build a good credit score, thus increasing your chances of obtaining loans from other lenders.

Purchase Protections and Warranty

There are credit cards that provide holders with additional insurance or warranties on purchased products. For instance, if you buy an item using your credit card and it becomes defective once the warranty from the manufacturer has expired, you can check with the issuer of the credit card to see if they’ll offer coverage.

Fraud Protection

In the United States, when a credit card holder loses their card and reports the matter to the issuer within 48 hours, then the maximum liability set for purchases completed after the card got lost is $50. That means if even the person who stole the card makes purchases worth $200, the original cardholder will only pay $50.

Cons of Credit Cards

Here are the disadvantages of holding credit cards:

Credit Cards Can Easily Lead You to Debt

By using credit cards to make purchases, you are utilizing the bank’s funds, not yours. These funds must be repaid along with the required interest. If you accumulate huge balances on several credit cards, it becomes difficult to repay the money, and this could cause you to go into debt.

Credit Cards Affect Your Credit Score

While repaying balances on your credit cards helps you build good credit scores, you can also build poor scores if you make late payments. This limits your ability to obtain loans from lenders.

Fees and Interest

As mentioned, the money on your credit cards is borrowed, so you must return it with interest. Moreover, most cards have annual fees that need to be paid.

Debit Card Explained

Debit cards make payments for purchases by deducting funds directly from your checking account. Unlike credit cards, debit cards have few fees associated with them.

Pros of Debit Cards

Helps Holders Avoid Debt

Since you are making payments using your own funds, you are likely to become financially disciplined by sticking to your budget.

No Yearly Fee

Credit card issuers impose annual fees but issuers of debit cards do not. So, as a debit card holder, you are able to avoid extra charges.

Cons of Debit Cards

Debit Cards Do Not Help Holders Build Credit

Building a good credit history allows you to secure loans at fair interest rates. Unfortunately, you cannot build credit with a debit card.