Credit cards and debit cards….they’re all the same, right? Wrong! A credit card is a plastic card whose holder has been granted a revolving credit line (unsecured credit). This piece of plastic provides the holder with the ability to make purchases and/or cash advances up to a predetermined limit. The credit granted can be paid in full by the end of a specified period or in part, with the balance taken as extended credit. Interest can be charged on the transaction amounts from the date of each transaction or only on the extended credit where the credit granted has not been paid in full.
Before getting a credit card, do your homework. It is important to know the terms before agreeing to the card. At a minimum, you should know: the annual percentage rate (APR), the grace period to pay the full balance without being charged interest, if there are any annual fees just for having the card, how finance charges are calculated, and if there are any transaction charges for such things as transferring a balance, late payments, cash advances, and going over the credit limit.
A debit card (also known as a check card or ATM card) looks like a credit card, but it functions differently. A debit card is a plastic card with which a customer can withdraw funds in their checking or savings account using an automated teller machine (ATM). A debit card can be used in place of writing a check at most, if not all, merchants. A debit card can also be used as a credit card in order to purchase goods and services, this is called a Point of Sale Purchase or POS. However, payment for the transaction comes directly from the buyer’s account, as opposed to a credit card transaction in which funds are loaned to the buyer by the credit card issuer.
Debit cards typically have no fees involved if you are careful when you use it. Be sure to check if your bank charges a fee if you use another bank’s ATM. Sometimes these fees can be upwards of $4.00 for every transaction. The main negative of debit cards is failing to immediately deduct transactions from your checking account. Failing to be careful with debit card transactions can cause a financial disaster. You could be out of money and get hit with a $35 overdraft fee and this can spiral out of control. Always know exactly how much money you have in the bank before you make a purchase using your debit card. That $3 coffee can cost you almost $40 if you get hit with an overdraft fee!
Choosing A Payment Method: Debit Card vs. Credit Card –
Determining a method of payment that is most suitable for each purchase can be tricky. This is especially true when you are comparing between a debit card and a credit card. Each of these methods has their advantages and disadvantages, and it’s up to you to choose the most suitable method depending on your needs.
First, you need to understand the meaning of these two forms of payment. A debit card provides you with a method to pay for your purchases without having to use cash because the money is directly debited from your account. On the other hand, a credit card acts just like a loan that usually comes with interest, if it’s not paid in full by the end of the billing cycle. All you have to do in order not to pay a fee on the loan is pay the total balance due, on time, each month.
Depending on Nature of Spending –
If you’re a compulsive buyer, then debit cards are the best method of payment for you. Knowing that money you actually have will be deducted from your account each time you shop, will reduce the temptation to purchase items you do not need. However, credit cards tend to encourage spending because you are not spending money that you already have because the money is being loaned to you and you must pay it back.
Rewards in Purchases –
Credit cards tend to reward you with cash back deals and discounts if the monthly credit card bill is paid on time. Therefore, by using your credit card, you stand to gain a lot if you can always pay in full each month. All you need to do is to learn how to control your spending.
Online Purchases and Fraud –
A credit card is usually less risky to use for online purchases. In case one’s information is hacked and used to pay bills, then it’s up to the credit card issuer to do all that they can to get the money back. Debit cards, on the other hand, are riskier when it comes to online purchasing. When hacked and used to make purchases, the debit card owner suffers the loss. Very rarely will a bank put that money back into your account. It is usually up to the debit card holder to get back their money.
Debit cards are very easy to understand how they operate. This is because, with any purchase you make, your money deducts from your account for that amount. It’s as simple as that! But, for credit cards, it’s a bit hard for people to understand how they operate. There are more terms and conditions, more fees, and more math involved. Lots of “fine print” involved when you sign up for a credit card.
Both debit cards and credit cards are very convenient. You either sign your name (credit card) or enter your security pin (debit card) when making a purchase. Sometimes your photo ID is required for you to make a transaction, this is true of debit cards and credit cards. It’s a smart idea to always write “See ID” or even “CID” on the back of your cards instead of signing your name. This way, the merchant must ask to see your photo ID to make sure you are the card owner. Not everyone will ask to see ID, though.
Improving Credit History –
Having a credit card and maintaining a good credit history helps improve your credit rating and will increase your credit score over time. Your credit history can be used in the future to obtain an auto loan or a mortgage. However, this is not the case for debit cards. Debit card records cannot be used to show your eligibility for a loan. Debit card usage and history is not reported to the major credit bureaus and does not show up on your credit report. So using a debit card has zero effect on your credit score or creditworthiness.
Debit cards are pretty secure in the real world if they are lost, stolen, or misplaced. Someone would need to know your 4 or 5 digit security PIN to be able to use your debit card. Conversely, credit cards are usually less secure because someone could always fake your signature. Both cards are not very secure when it comes to online shopping because you don’t need your PIN or signature for online purchases. The online security technology used on credit cards and debit cards is pretty low, hence making them both susceptible to fraud when it comes to shopping online.
We’ve laid out the main differences between credit cards and debit cards. We’ve also discussed the similarities. Now, it’s up to you to use each card wisely and in the best possible way. Remember, that credit card debt is pretty hard to get out of and it can sneak up on you. Stay hyper focused and diligent when using both your debit card and credit cards.
If you need help getting out of credit card debt, give Advantage CCS a call today. Our phone number is 1-866-699-2227.The call is completely free and always confidential. We’ve been helping people get out of debt since 1968 and we can help you too!