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Pile of assorted payment cards - debit and credit card

Pile of assorted payment cards - debit and credit card Image from https://cutt.ly/iKwcKIE

Personal Finance: Debit Vs Credit Card – What You Need To Know

Nereah Obimbo by Nereah Obimbo
17 June 2022
in Personal Finance
Reading Time: 4 mins read
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Debit and credit cards are common terms in our society, yet the specifics of what each means are not always clear. Here’s a brief introduction to debit and credit cards which are the most common payment methods in the world including the advantages and disadvantages of each.

Credit cards

A credit card is issued by a financial institution, typically a bank, and allows the holder to borrow funds from that institution within a pre-set credit limit. You can use the card to make purchases and afterwards repay the amount with interest. The card also allows the holder to withdraw cash (line of credit, LOC) through an ATM and then repay later.

Advantages of credit cards

Buy now pay later

A credit card allows you to access funds you don’t have and make purchases that you need even if you don’t have the money then pay later. The borrowed funds are repaid in small monthly instalments. This short-term financing is a major attraction and incredibly beneficial when someone has an emergency.

Widely accepted

Credit cards are the most widely accepted mode of payment globally.

Build credit history

Credit card usage is reflected in your credit report and can be used to rate your credit worthiness. If you make your payments on time, you are rated as a responsible spender and credit-worthy person.

Better fraud protection

Your liability for any fraudulent charges made on your card is capped at $50 and is often zero liability. This may be because with a credit card, you’re essentially borrowing money from the bank and using their money, so it’s in their best interest to protect their money.

Rewards

Credit cards offer a variety of rewards including cash back, travel points, and other point-based rewards based on how they spend.

Disadvantages of credit cards

The danger of spending more

While credit cards have a limit on how much you can borrow, you’re still borrowing and the impulse to spend more then pay later. It’s easy for your spending to get out of control leaving you with an overwhelming credit card debt. Paying using credit cards has an inherent danger of overuse.

High interest and fees

If you don’t pay your debt within the month, you are charged a high-interest rate on your unpaid balance that carries forward. Late payment fees can pile up and end up being costly. Credit cards also have multiple fees attached to them.

Negatively impact your credit score

Using a credit card can also negatively impact your credit score. For example, if you are unable to make your payments in time for whatever reason even if it’s genuine or max out one or more cards or apply for new credit too often.

Debit cards

A debit card is a payment card that makes payments by deducting money directly from the person’s account rather than a loan from a bank. You can only access the funds that you have in your account, no more. Frugal people prefer them because you can’t spend more than you have and there are usually few or no associated fees.

Advantages of debit cards

Avoid debt

A debit card accesses only the money the person has in their account so there is no chance of racking up debt.

Protection

Debit cards require a four-digit pin in order to complete the transaction, ensuring protection from fraudulent activities.

Cheaper

Debit cards are cheaper to use. There are no interest charges and no fees attached to using them.

Disadvantages of debit cards

Limited fraud protection

If your debit card is stolen, you could easily find yourself on your own with your money gone. Debit cards typically have less fraud protection likely because it’s your money at risk not like credit cards where the money on the line belongs to the bank that’s lending to you.

No rewards

Debit cards offer no rewards or points based on usage, unlike credit cards.

Won’t build credit

Using a debit card will not build your credit score, only credit cards and repayment of the associated debt builds the credit score.

Overdraft fees

An overdraft occurs when there isn’t enough money in the account to cover the transaction or withdrawal, but the bank allows you to withdraw the amount you want regardless. This feature is not free but comes at a price. Other fees include monthly maintenance fees, returned item fees, and foreign ATM fees.

Check out

8 Ways to fix your finances to avoid being broke

7 Pros And Cons Of Using A Credit Card

3 Things To Know About Credit Cards In 2020

7 Simple Rules For Credit Card And Debit Card Safety

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Nereah Obimbo

Nereah Obimbo

Writer. Youtuber. Filmmaker. Abolitionist. Pessimism of the intellect, optimism of the will.

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