Differences Between Credit Card and Debit Card

Cards are the financial instruments issued by financial institutes like banks or credit unions. Modern world citizens are widely acquainted with the usage of bank cards like debit card, credit card, ATM card, etc. To get the maximum benefits out of these cards, their concept, key attributes, differences of one from others, etc. should be clear to all. In this article we will explore the differences between credit cards and debit cards.

What’s a Debit Card?

A debit card is a financial instrument issued by the banks against a checking accounts of their customers. Debit cards enables the users to utilize the money deposited in their bank accounts at ATMs, POS terminals, e-commerce websites, etc. Debit cards are only workable when there is sufficient amount of money in the linked checking accounts in the bank.

What’s a Credit Card?

A credit card is another financial instrument of any bank or credit union that allows the cardholder to utilize a borrowed fund. Banks allocate a certain credit limit to the card for its holder. The cardholder can use this limit uninterruptedly until exhaustion to make purchase of goods at POS terminals. Even in e-commerce transactions or online shopping credit cards can be used.

Differences Between Debit Card and Credit Card

Beside some similarities, there are some major differences that help to choose whether to get debit card or credit card. The major distinctions are brought to the discussion here.

The Source of Fund

The primary difference between debit and credit cards is the source of fund by which the cards are backed financially. In case of debit cards, the money is being pulled from the linked checking account of the customer. If no sufficient money is available in there, the card transaction will not be executed. On the other hand, credit cards have allotment of certain credit limits. When a cardholder uses his credit card, he actually borrows a portion of that limit from the issuer bank. Eventually, he has to pay the debt plus the interest, if any, back to the bank. Hence, debit card is a non-debt instrument and credit card is a debt instrument.

Differences in Bank Statement

Banks do not send statement for debit cards, rather prepare statement of the linked checking account. These statements are prepared covering a period of a year, six months or a quarter. Contrarily, credit card statements are generated on a monthly basis. Each of the month is a billing cycle and the cardholder must pay the outstanding amount within the due date which is usually fifteen days later to the statement date. Mentionable that debit cards do not require any obligated payments whereas credit cardholder must clear his dues within a stipulated time.

Differences in the Cost of Debt Card And Credit Card

Maintaining a debit card is not very costly. One just has to bear the annual card fee and charge for regeneration of lost PIN, which are very nominal. Obstinately, carrying a credit card will cause someone to pay a varieties of fees and charges. Those are annual card fee, notification fee, check processing fee, balance transfer fee, cash withdrawal fee, excess over limit fee, and so on. Moreover, using debit card does not result in obligation to pay any interest for the used fund as customer is spending his own money. But credit cardholders spend the bank’s money and bank charges a high amount of interest on that fund, usually 10%-14% APR.

Differences in the Benefits They Get

Credit cardholders get a lot of benefits and privileges due to their possession to the cards. Banks reward the cardholder with points which can be accumulated on the card. The card owner can redeem these reward points to make payment of outstanding bills. They can also use these to get gift vouchers at renowned stores. Using credit cards also pay off with attractive cash back promotions on spending, winning of vacations, and even shopping card at selected stores. On the other hand, debit card users get only a limited amount of cashbacks, but no reward points or winning of luxury vacations. Whereas credit cardholders enjoy top notch lounge facilities at airports, debit card users are not offered with the facility.

Opportunities to Build Credit History

Credit cardholders get an opportunity to build a credit history for pursuing any future loan of much serious weights. Using credit cards on a specific interval and repaying the debt on timely basis leads to create a impressive and trustworthy history for the borrower. But a debit card user never gets any effect from his card usage since he is spending his own money. As such, there is nothing to report to the credit bureau and so it will not affect his credit history.

Opportunities to Utilize EMI (Equated Monthly Installment) Facility

Purchases with credit card allows customers to pay off the amount in EMIs. But when bought with a debit card, price of the item has already been paid in full. So nothing left to pay on instalments.

For example, two friends Richard and Harold went to bought two sets of earpod at the price of $200 each. Richard paid with his debit card from his checking account. But Harold did not have enough money in the account to complete the transaction. He used his credit card and paid the product price to the merchant. Later Harold contacted with his bank and transferred the transaction amount to bank’s EMI scheme. Then he did not have to pay the whole money in the very next month. He would pay $17 each month for the next 12 months and Richard had to pay whole $200 instantly.

In Terms of the Protection Against Financial Fraud

For protection against financial fraudulent activities or identity theft, credit cards are more effective than debit cards. If someone’s card is lost or stolen, he must report the situation immediately to his bank. Most of the banks have their own 24/7 hotline to serve these kind of purposes. Once reported on the lost/stolen card, the user will not be liable for any further usage of the card.

If the lost card is used before reporting, the liability will vary depending on the how fast the user has reported on the matter. Debit cardholder will have to bear up to $50 if he reports lost card within two business days, up to $500 if reports after two business days but before 60 calendar days, and whole amount if reports after 60 calendar days. But as per the Fair Credit Billing Act, credit cardholder will only be liable up to $50.

Efficiency in Managing Money

Debit card is very helpful for money management plans. Its users learn to spend according to his earning. Since debit card does not allow over usage of money the customer has in account, he remains cautious to act accordingly. Using credit cards in an unplanned way may lead a person to huge pile of credit card debt burden in no time. If someone spends with his credit card and pays even only the minimum amount, outstanding debt will increased in compounding principle.

For example, Audrey wants to take a vacation to Paris but has only a sum of $2,000 in her account. She estimated that this trip would cost her at least $4,000. So, she decides to take the vacation later. But Neil wants to get a laptop of $1,000 with his $1,500 credit card limit. He plans to pay only the minimum amount of $50 in the next month. His bank will charge interest on the remaining outstanding amount and the debt will stand at $958 in the next month, at $948 in the following month and it will continue. Till the whole amount is settled Neil would have paid a huge chunk as interest.

Bottom Line

Differences between debit cards and credit cards are a bit confusing since both type of cards are accepted in the similar kinds of places. Proper knowledge regarding the distinctions is necessary to avoid any financial disruptions. Though debit and credit cards can be used for the same purpose in the same way, consequences of the both are not the same.