What’s the Difference Between Debit and Credit Cards?

Credit and debit cards usually look almost identical. They have a 16-digit number, an expiration date, contain the cardholder’s name, and also feature a chip and a magstripe. Also, they’re protected by a Personal Identification Number (PIN) code. Both types of cards can make it easy and convenient to make purchases at a physical or online store.

The convenience and protection they offer are always effective, but what is the difference between a credit card and a debit card that could significantly affect your finances? Here’s how to decide which payment card will suit your needs.

Key Differences Between Credit and Debit Cards

Although they look almost identical, debit and credit cards have key differences that you should know about.  

You can withdraw cash with both types of cards. However, credit cards charge interest because you are essentially borrowing money from the bank and are expected to repay this amount at a later stage.

Also, credit cards help you build and extend your credit history, which is a statement of your work with resources that do not belong to you, but to your bank. On the other hand, with a debit card you pay or withdraw funds you actually own.

In addition, credit cards may be more suitable for larger purchases, although the amount will be carried over to your statements for next month, in addition to credit card interest rates.

Conversely, debit cards do not issue statements. 

You will receive your report only at the end of the month, and you can see the opening balance, followed by the number of purchases and ATM withdrawals you have made during the period.

What Is a Credit Card?

To be able to understand the difference between a debit and a credit card, it’s important to acknowledge the characteristics of both of these cards individually.

A credit card is a means of payment issued by a financial institution, usually a bank. It allows the cardholder to borrow money while using it, provided that the cardholders agree to return the funds with interest, according to the rules of the institution.

They come with a credit limit, which means that spending money at a point in time above a certain amount won’t be possible. 

Credit card users can not only withdraw funds but also use discounts, travel points, and many other benefits not available to debit cardholders. They can apply prizes for fixed or differentiated rates. For example, you may have a card that offers an accumulation of bonus points to book future trips abroad.

The standardised credit package includes standard cards, where the user can take advantage of a line of credit for making purchases, balance transfers, and cash advances. 

Credit card providers also issue many other categories of credit cards such as premium cards, rewards cards, balance transfer cards, secured credit cards, and charge cards. Keep in mind that each one of these options comes with its own peculiarities, benefits, and drawbacks.

How Does a Credit Card Work?

At its core, a credit card enables users to borrow money from credit card issuers when making purchases. This means that the credit card company ultimately covers the expenses associated with the purchase upfront, while you agree to repay the amount later. 

This process works via several stages. 

First, the user needs to open a credit card account with a chosen card provider. They will be evaluated based on their credit history, credit score, and income. Based on the outcomes of this evaluation, the user will be approved or rejected for a credit card and given a credit limit.

If a business accepts credit cards, they’ll be able to process payments via a credit card network like Visa or Mastercard. When shopping from such businesses, cardholders can present their card at a POS system that will require the user to either swipe, insert, or tap their card. 

The POS system will then process the payment through a credit card network connection and will verify whether the transaction can be completed. 

Once approved, the credit card company transfers the money to the merchant. The user, on the other hand, will receive an account statement each month outlining all of the payments made, fees, and interest charges. 

The user can choose between paying off the full balance or making a partial payment. However, keep in mind that there will be a minimum payment amount due. Naturally, making a full payment means that the user can avoid accumulating credit card debt. 

Advantages and Disadvantages of Credit Cards

One of the first benefits of using credit cards is that they give you extra control over paying for purchases. At the end of each month, you will receive a statement stating how much you owe for purchases made in the last 30 days. 

Depending on when you made your purchase, you have up to a few weeks to pay a portion of the amount due on your credit card. Technically, you are required to pay only the minimum fee each month to keep the card operational. At the same time, carrying a balance leads to charged interest that can add up over time. 

For example, if you spend 1,000 GBP for a month, but pay only the monthly fee on the card, and spend the same amount again in the next month, you will probably fall into the debt trap. Each month, when you do not pay the entire bill you owe, there will be a certain amount charged for interest. 

A useful tip is to pay off your debt as quickly as possible to avoid accruing high-interest rates.

In addition, using a credit card builds your credit history. Every time you buy something with your credit card and then pay it on time, your credit history will be enriched. Building an excellent credit history is important when you are about to take out a loan to buy a car or a home. Paying the amount due on your credit card will show that you can repay your debt and can be trusted.

Moreover, most credit card providers offer fraud protection, which helps keep you safe against unauthorised charges if your card details are stolen. In cases of credit card fraud, it is strongly recommended to report the fraudulent activity immediately. Furthermore, credit cards are covered under the Consumer Credit Act, which provides additional security. 

Having a credit card is also very useful for emergencies, for example, if you have to pay extra for repairs in your home. In this case, these costs are unforeseen and the institution that issued your credit card will provide you with a loan that they expect you to repay at the end of the monthly reporting period. Again, this gives you time to react and the ability to deal with emergencies.

Not to mention that credit cards provide opportunities for cash withdrawals, although they are associated with cash advance fees and interest. 

What Is a Debit Card?

A debit card, on the other hand, allows cardholders to spend money directly from their own account instead of relying on a bank loan. Debit cards offer convenience and protection similar to credit cards. 

In most cases, large payment network companies such as Visa or Mastercard issue them.

If you do not have access to a bank account, prepaid cards provide you with a way to make e-purchases up to the amount that’s pre-loaded on the card. 

When making a purchase with a debit card, you’ll see the funds reduced from your checking account instantly. 

Thrifty users may prefer to use debit cards, as the service usually has little or no fees unless cardholders use more funds than they have in their savings account and/or use an overdraft facility. This does not apply to prepaid cards, which often charge activation and usage fees, among other costs.

In contrast, the use of credit cards usually leads to the accrual of annual fees, fees for exceeding limits, those for late payment, and an abundance of other penalties, besides the monthly interest on the outstanding balance.

How Does a Debit Card Work?

So how do debit cards typically work? When making debit card purchases, the funds are instantly taken from your bank account, where you won’t be able to use more than you already own. 

The process of making a payment with a debit card is similar to that of a credit card. The user swipes, taps, or inserts the card at a POS system, which sends a bank request. The bank then checks the debit card account to verify if there are sufficient funds to complete the transaction.

Given that there’s enough money, the payment is approved and the sum is immediately taken from the account balance. This helps users avoid paying interest as they’re not spending the bank’s money but their own. 

Most debit cards typically require a PIN or a signature in order to authorise the purchase.

Advantages and Disadvantages of Debit Cards

Using only a debit card instead of a credit card is a good way to reduce your chances of accumulating debt. 

This form of payment limits you within your budget and prevents you from spending all the funds in your current account. If you ever spend more than your account allows, they may charge you additional fees. It is also possible to use an overdraft facility if you have activated this service.

Debit cards give you easy access to your money, and you can use your card to withdraw cash from ATMs. If you prefer cashless payments, then through the card you can pay at contactless card machines or online.

Since the money from the purchase you make with the card is deducted directly from your current account, you do not have to worry that you will accumulate unexpected debt at the end of the month. This also means that you will not have surprising interest rates.

In addition, you can enjoy the fact that there are little to no fees when withdrawing cash. 

However, there are also some disadvantages and limitations that come with debit cards. For example, their immediate impact on your account balance is a feature to keep in mind. With a debit account you may also accumulate overdraft fees if you’re not keeping a close eye on your spending. 

Another limitation is that debit cards are usually associated with less fraud protection when compared to credit cards. 

Overall, overdrafts and overdraft fees may present challenges, yet using a debit card remains a great way to control your expenses! 

Why Is My Debit Card Declining When I Have Money?

Choosing the Right Card for Your Needs

When trying to determine whether to use a credit or debit card, you need to be honest with yourself about your ability to handle credit. If you have spending problems, it is better to use a debit card to prevent the accumulation of debt.

The choice of the card also depends on the purchases you intend to make. For example, some hotels make using a debit card inconvenient or completely impossible. They may require utility bills, personal statements, bank payments, or other proof of solvency before accepting your reservation. Also, that way it’s easier to charge extra for any damages on the hotel premises.

Working with a credit card may also be a better option if you want to take advantage of special rewards programs through bonus points. Remember that this system only helps you if you pay the amounts due in full each month.

If you are trying to build a credit history, using your credit card is an excellent step in the right direction. Paying off debts on time will create a good rating and show responsible behaviour, which is reported to the credit bureaus and reflected in your credit report.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.