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.
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