Understanding how debit and credit cards work, and what are the differences between them, allows you to make more informed financial decisions. Both debit and credit cards are widely accepted worldwide, and they give you access to money, without having to carry cash or your checkbook with you.
Knowing the pros and cons of both types of cards, will help you use them appropriately and take advantage of the benefits that each one offers. As a Money Smart Athlete, you should realize that there are important differences between credit cards and debit cards. You should understand the dangers of not using the cards effectively, and you should work on developing the skills to manage them efficiently. There is also the chance of overspending, which in the long run can create a debt problem. If you dream of overcoming these obstacles and have a successful financial future, we highly recommend that you familiarize yourself with the differences between debit and credit cards.
What is a Debit Card?
- Debit cards are linked to a bank account.
- When you use a debit card, the amount of the purchase is automatically deducted from your bank account.
- When you use a debit card, you cannot make a purchase for more than the balance in your bank account. (If you have US$400 in your account and want to make a US$500 purchase, you will be unable to do that with a debit card.)
- A debit card is an alternative to carrying cash.
A debit card works like a plastic check. Just like when a check clears, using your debit card deducts money automatically from your checking account. The money is automatically withdrawn at the time of the transaction – unlike a credit card, where the charge is placed on an invoice that you will be asked to pay later.
What is a Credit Card?
- A credit card is a loan from a bank or company.
- The lender pays for the purchase at the time of the purchase, and you must pay the lender back over time.
- The lender of your credit card charges you interest each month, until the amount is paid in full.
- When using a credit card, if you do not pay off the card in full each month, you end up paying more than the amount for which you purchased the item because of interest and fees.
- Many credit cards offer bonuses like gifts and airline miles with each purchase. Educated credit card users who pay their bills in full each month can take advantage of such offers.
- Generally, credit cards offer greater protection in case of theft.
Using a credit card is basically the same as a loan. The credit card company lends you money and charges you fees and interest for borrowing money from them. The interest rate is usually determined from your credit history, which in essence is your past record of paying your obligations and handling credit.
Credit cards are convenient; most businesses accept them and they’re easier to carry than cash. Credit cards can be a handy tool for your purchases as long as you pay them in full each month and avoid paying sizable interest fees. However, when faced with an emotional or impulse purchase, pulling out the plastic can be far too easy to do. If money is tight, it’s easy to talk yourself into thinking “charging it” is no big deal. But if you don’t spend responsibly, receiving that credit card statement at the end of the month can be an unpleasant experience.
Debit Cards vs Credit Cards
There are people who believe that a credit card is necessary for some transactions such as online purchases. It’s also believed that it is safer and easier to travel with a credit card rather than carrying cash or a checkbook. However, debit cards offer the same convenience with the difference that you do not have to borrow the money to make the payment, you just use what is available in your bank account. It may be difficult to determine when to use a credit card or a debit card. Some argue that a credit card offers additional insurance on purchases and makes it easier to request a refund or a return. However, credit cards usually carry a higher annual fee than debit cards.
It is obvious from the above that a combination of the two types of cards gives you the best of both worlds. You can use your credit card carefully to boost your credit, and at the same time pay for daily purchases with your debit card. The best way to manage a credit card is to be the bank’s worst customer. Banks and credit card companies make their money when customers carry a balance from month to month. Plan and budget for your purchases properly so that you can pay your credit card bills in full each month. You may think it’s okay to pay just the minimum payment. That’s a common misunderstanding. In fact, the minimum payment just represents the minimum amount that will keep your account active. It’s not enough to actually repay the debt in a reasonable time.
If you need any help in making yourself more familiar with how debit and credit cards work, and how you may use them to your best interest, you can get in touch with us at [email protected].