Many, many people don’t understand the difference between a debit or a credit card. Much less do they understand how they both work, their advantages and their disadvantages. They’re more than just a way to access your money in your bank account. Debit cards do essentially allow you to access the money in your bank account digitally. When you use your debit card, the money is taken out of (withdrawn) from your account immediately. Credit cards operate differently. They operate based on a loan or sorts, or a line of credit. That loan is interest fee as long as you pay it off in time. Credit cards are not directly connected to your bank account but are actually connected to the bank or organization that gave you the card. When you make a purchase on credit, you now owe the amount paid to the card issuer.
Generally, debit cards are completely free with normal transactional bank accounts. They can also be used to take cash out of ATMs. Credit cards on the other hand often have reward or loyalty programs included. To properly understand which type of card you should be using, we’ll go through the benefits as well as the disadvantages of each.
Credit Cards
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Credit cards include a monthly bill that gets sent to you every month listing out the transactions you made with it and the required payment. Acquiring a credit card can be difficult as they take into account your credit score and other personal details. The spending limit is decided upon by the card issuer. These limits may grow or shrink depending on your credit-worth. As was noted previously, if you fail to pay your bill by the due date, interest is charged on those funds. Generally, the interest rates are high.
Fraud and security is of great concern to many users. Security is getting better and better but is still something you need to keep in mind. At times, keeping a low credit limit on your card is a good idea. In terms of fraud, your liability in those cases is almost non-existent. Fraud is not really a big issue with today’s credit card contracts.
Understanding the fees and charges as well as interest rates for credit cards can be quite difficult and time consuming. For this reason, many people opt for the simple nature of debit cards, you simply buy something and the money gets taken out of your account. Despite this though, all problems that arise from credit cards are all due to user error. Simply paying your monthly balance means you will not be charged any interest. So again, user error is the sole problem with credit cards. Understanding your spending habits and controlling them will help you use credit cards properly.
As is expected, using a credit card helps you build better credit. Improving your credit scores allows you more credit and better rewarding credit cards. As was previously stated too, credit is more secure when dealing with fraud so using credit more often is more secure. With debit cards, once the money is gone, it literally is just GONE.
So what do you need to do to use a credit card properly?
- Avoid cards with annual fees. There so much competition, there is no reason to be paying an annual fee.
- Make a budget and stick to it. Not doing this could mean you’ll be spending more than you usually would using cash or a debit card.
- Always, always, always pay off the monthly balance fully and avoid accruing interest.
- Stay under your credit limit at all times. Control your spending; that’s why a budget is important.
Credit cards provide you with great opportunities to make the most out of the credit but also create the ability to ‘stuff up’. If you don’t think you’ll be able to use them properly, look towards debit cards.
Debit Cards
Debit cards as naturally simpler. Easy to get, easy to use and easy to understand how they work and how best to use them. There are 2 main benefits to debit cards. Firstly, there are no minimum charges. Secondly, debit cards are accepted in more locations. This second point is not always a big issue but there are definitely more places that accept debit cards as opposed to credit cards. Debit is the best option if the seller needs to get payment immediately. Payment via debit is instant. Credit cards can sometimes have some delay due to the credit card company processing the payment.
Debit cards are a great way to keep you handling your money properly and keeping a tight budget. You can’t spend more money than you have and you will always have your account balance in mind when buying.
If you are traveling overseas, buying tickets and accommodation with a credit card is a good idea due to travel insurance and the likes. However, when it comes to foreign currency, grab your debit card and withdraw from an ATM. You get much better exchange rates.
The best way to use a debit card is to use one linked to a specific account that only has money for transactions in it. If your card is compromised, you are not losing your whole fortune.
Debit cards are so simple that there’s not much else to know about them. There are a few places you should not be using your debit card though! Buying online with a debit card can be quick insecure as you have no protection at all. Supermarkets and petrol stations are not the best places to use debit cards either. Card skimmers are prevalent in these places and using a debit card, again, offers no protection.
So which should you use?
The decision is yours. You know and understand how you spend and what you spend your money on. A credit card is the best if you are able to control your spending and are disciplined enough to pay the monthly bill on time. If you find yourself struggling to control your spending and feel like you will abuse the power of the credit line, stick to a debit card and be careful where you use it.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.
