At a quick glance, credit cards and debit cards look pretty similar. They’re both small, plastic card you can use to buy things.
However, these two cards have several major differences. Understanding these differences is very important for planning your finances.
1. Source of money
First off, these two cards draw money from different places. When you pay with your debit card, you are spending your own money since the card is connected to your bank account, so every time you buy something, the card is taking money out of your account. This saves you the hassle of constantly having to draw money out of the ATM.
With a credit card, you’re spending the credit card company’s money. You’re taking a short-term loan for your purchases the lender will ask you to pay back at the end of the month.
However, when you open a secured credit card, it’s actually your own money you’re spending!
If you pay off all of your credit card purchases each month, you won’t owe anything extra for using the card. However, if you keep an outstanding balance, the credit card company will charge interest on your balance.
A debit card never charges interest on your purchases because it’s just spending your money. You aren’t borrowing with this card.
Also try to find credit cards with the lowest interest rates to keep your debts under control.
To use a debit card, you often need to enter a Personal Identification Number (PIN) into the card processor at a store. This is a four-digit password you set up to verify you are actually the one spending money.
Credit cards don’t use PINs. You just need to sign a receipt after you buy something.
“Both the debit card and credit card
play a valuable role in society today.”
4. Credit score
Your credit score is a figure that represents how well you manage loans. This score is calculated by three different credit bureaus (TransUnion, Equifax, and Experian) that regularly collect information on all your loans.
Since a credit card is a type of loan, it impacts your credit score. Paying off your card on time will help your score while missing payments hurts your score.
Using your credit card responsibly is a good way to build credit so you can qualify for a mortgage or a car loan later on.
A debit card has no impact on your credit score. You won’t build up a good credit rating by using this account.
If you don’t know it already, but sure to check your credit score as soon as possible.
To attract new members, many credit cards offer reward programs. You can earn bonuses like free flights, hotel stays and cash back just for using your credit card.
Debit cards don’t typically offer rewards. While you may occasionally see a debit card that offers some small reward for use, it’s much more common to see rewards with credit cards.
6. Fraud protection
Credit cards have much better fraud protection than debit cards. If someone steals your credit card, you have roughly two months to report the fraudulent charges to the credit card and you’ll owe no more than $50.
With debit cards, you have a much shorter time (roughly two days) to report a problem. It’s safer to pay with a credit card because of this fraud protection.
Both the debit card and credit card play a valuable role in society today. Keep these differences in mind so you can figure out which card is best for your needs.
Photo source: ehow.com.
Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.