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Foolproof Guide For Newbies
If it’s your first time trying to understand the difference between a debit and credit card, it can be confusing to figure which one works best for you. Don’t worry! We know why you feel that way. They look the same and have the same function so it can be confusing at first.
However, there are differences between the two cards and it’s essential to know these differences so you don’t make financial mistakes. One of the significant distinctions between the two is how the card is funded. You use your bank accounts to fund your debit cards, while you use your credit line to fund your credit cards.
What Are Credit Cards?
There are different types of credit cards available such as business cards, airline credit cards, travel credit cards, and more. But in general, think of credit cards as loans where you have a certain amount of money your bank wants you to spend, but it’s up to you how much of it you want to use.
When you apply and get approved for a credit card, your issuing bank will give you a line of credit, commonly known as a credit limit. Credit limits are the loanable amount banks will provide you with and it will be based on the income you earn and your credit history.
You will be billed every month for the amount you’ve spent, but there are also times where you can pay the balance on an installment basis and it depends on the payment terms you’ve chosen.
Also, there are cards that are called 0% APR cards which allow cardholders to pay for purchases at 0% for a certain period of time. The terms are either 6, 9, or 12 months (sometimes more) and it’s usually a one-time offer only as a way of getting people to sign up for the card.
It’s essential for first-time credit cardholders not to max out or use all of their credit limits because it will affect their credit score negatively. Low credit utilization will help build your credit score, and a good credit score will get you approved for more credit cards in the future.
Advantages Of A Credit Card Over A Debit Card
People use credit cards simply because it’s convenient. For example, when thinking of the difference between a debit and credit card, you can use credit cards to purchase goods and services in advance, even if you don’t have the money yet. But aside from that, there are other benefits credit cards offer:
- It Helps Build Positive Credit Score – If you have a credit card and use it responsibly, you’ll build up a good credit history and eventually get a good credit score. Different companies use this to assess if you qualify for housing loans, car loans, or other credit cards.
- Buyer Protection – You can go for cashless payments if you have a credit card, so there are fewer chances of losing your physical money. You are also protected for digital theft because your company can reverse any fraudulent transactions when you file a complaint.
- Points & Rewards – Different credit cards offer different benefits, such as free hotel stays, cashback, and free flights. An example of a cashback card is the Chase Freedom Flex which offers a 5% cashback on Walmart, Amazon, restaurants, and other partner merchants.
- Extra Perks – Most credit card companies partner up with different merchants and come up with exciting deals. These are called co-branded credit cards, and they usually offer deals like extended warranties, 0% APR periods, and even limited-time free subscriptions on streaming services. One example of a co-branded card is Amex’s Delta Reserve Business Card which provides travelers free access to its SkyClub Lounges.
Disadvantages Of A Credit Card Over A Debit Card
There are always two sides to a coin so let’s also talk about the list of disadvantages that credit cards have. The list includes:
- Overspending – This is probably the main reason why people are so afraid of credit cards. They’ve probably heard stories where people end up paying high-interest rates just by using credit cards. It’s true! It can happen if you’re not careful enough in tracking your purchases and paying your loans on time.
- Annual Fees & Other Hidden Charges – Some credit cards, especially business cards, come with annual fees. There are also other fees like balance transfer fees and late payment fees. The fees would usually depend on the card you applied for. However, there are lots of no-annual-fee cards in the market which are perfect for beginners.
- Limited Acceptance – Unfortunately, some stores still don’t accept credit cards, and even if they do, they only accept major credit cards like Visa and Mastercard. Unlike debit cards, you can’t use credit cards to withdraw at ATMs either.
- Added Business Costs – This is the reason why some stores still prefer cash or debit cards. Credit card transactions can about $1.50 per transaction compared to debit cards that cost below 20 cents. If a store goes cashless, expect an increase in their prices because they will surely pass on these added costs to consumers.
What Are Debit Cards?
Banks issue debit cards, so they people don’t have to carry cash or checks around with them. But even though they have the same function and appearance as credit cards, they’re entirely different.
Debit cards are directly linked to your bank accounts, which means you need to fund your accounts first before you can actually use your card. For example, if you deposited $5000 to your bank account, that will be the amount of money you can use for your purchases. There’s no credit limit, and it won’t affect your credit score because it’s your own money that you’ll be using.
Advantages Of Debit Cards
What’s excellent about debit cards is that you can use them worldwide as long as the merchant uses electronic payment and accepts your debit card issuer. The other benefits that come along with it include:
- No Overspending Limits – You won’t get penalties for overspending because you’re using your own money in the first place. You’ll be spending whatever the amount you have in your bank account.
- Low Fees (Or No Fees At All) – Debit cards do not have annual fees. They do incur fees whenever you use them for swipe and online purchases, but they’re mostly minor fees compared to credit cards.
- No Interest Charges – You won’t get interest charges for your purchases. It’s simple as that.
Disadvantages Of Debit Cards
By now, if you think debit cards are way better than credit cards, think again. Debit cards also come with a lot of disadvantages too, which are:
- Overdraft Fees – Banks give debit cardholders the option to overdraw on their accounts, which means a person can still spend money if there’s no money in their account. This is an optional feature, but people usually keep it for emergency purposes. You would pay hefty fees If you did consent to this option and overdraw on your accounts.
- You Need To Check Your Balance Manually – If you opted for the overdraw feature, you need to check your balance to avoid overdraft fees regularly. Your banks will not do it for you because it’s one way they earn money from you. Try setting up an online account so you can easily access your balance using your desktop or mobile phone.
- Limited Rewards – Debit cards also come with rewards, but they’re not as lucrative as credit cards where you can get cashback, free stays, and free flights.
- Doesn’t Build Credit Score – Your debit card spending doesn’t affect your credit score negatively, but it doesn’t affect it positively either.
- Less Protection – You might feel safe with debit cards because you’re not carrying physical money, but it has less fraud protection compared to credit cards. Credit card users are protected by the FCBA (Fair Credit Billing Act) where it states users will not be charged more than $50 for any amount of fraudulent transactions. This is simply not the case for debit card users, and it’s possible you can lose a lot of money if any fraudulent transactions happen to you.
What Points Panda Recommends
Personally, a credit card is always better than a debit card. Why? You can use credit cards in almost any purchase, whether online or in-person. Plus, credit cards have a lot of additional perks like monthly installments, rewards, cashback, extended warranties, and of course, extensive cardholder protection.
Plus, it’s not only debit cards that have zero fees because there are also credit cards with zero annual fees or late fees. The only thing that credit cardholders need to remember is to choose the right credit card and always to pay their balances on time. This will help you maximize the rewards of each card and avoid penalty fees.
Try to read some of our credit card reviews to learn about these different cards and how to use them properly. Or you can also sign up for our travel concierge if you want unlimited travel assistance and credit card consultation.
Now when should you use a debit card? We recommend that every person gets a debit card, not for spending purposes, but to have easy access to their savings account in times of emergency or to purchase essential things.
Debit cards are also perfect for people who overspend because this helps them practice proper money management until they’re ready to have credit cards. Also, go for debit cards if you’re someone who doesn’t care about rewards and don’t like the idea of debt.