They are both small plastic cards that you can use to buy stuff and you probably have one of each in your wallet or purse. But did you know they each have distinct differences? Debit cards and credit cards can both be great tools to use when purchasing goods and services. Is one better to use than the other? First, let’s find out how each works.
How does a debit card work?
When you use your debit card, funds are generally taken from your bank or credit union savings or checking account. The money is taken instantly. So it’s always wise to know how much you have in your account before using your debit card. You can use your debit card for PIN-based or signature-based transactions.
How does a credit card work?
Some may remember this old (but factual) phrase: Buy now, pay later. That’s essentially what you’re doing when you use a credit card. You’re borrowing money to get the good or service now. You are issued a certain limit by the credit card issuer (bank or credit union), in most cases, depending on your credit score. You may also be able to withdraw cash from a credit card but beware, sometimes those types of transactions carry a hefty interest rate higher than a normal purchase rate.
There are also secured credit cards. These cards typically require a cash deposit to be used as collateral. For example, if you have less than fair credit, but you have $500 cash, you can deposit that amount to open a secured credit card with a $500 credit limit. If for any reason you default on the card, the credit issuer can take the money you initially deposited.
So which is better, debit or credit?
Generally, debit cards have low or no fees associated with them (unless users spend more than what’s in their account to incur overdraft fees). They also allow you to control your spending. If you have $1,000 in your account, chances are you won’t make a $1,500 purchase with your debit card knowing you have less than that. In essence, debit cards can curb spontaneous or impulsive spending.
With credit cards, you have the opportunity to raise your credit score if you’re responsible for using it. They may also provide additional warranties or insurance for certain items purchased as well as rewards. Credit cards also offer greater protection in most cases when it comes to loss or theft.
Here’s the bottom line: debit cards and credit cards each have their own valuable uses. If you’re a responsible spender who can pay back a credit card in full within a month, perhaps reaping the benefits of a credit card is for you. If, however, you’re looking for lower fees and are less disciplined when it comes to spending, a debit card might do the trick.