Using credit and debit cards continues to be the safest and most convenient way to pay for goods and services. Today, features and advantages ranging from tap-to-pay and cashback rewards make these plastic payment tools even more beneficial for consumers. However, as commonplace as they are, most cardholders have no idea of their differences and, more importantly, when to use them.
Debit And Credit Cards Aren’t The Same Thing
On the surface, it would appear that debit and credit cards are the same. They’re plastic cards with the name of a bank, 16 digits, a Visa or Mastercard logo, an expiration date, and a security code. You can swipe or tap them at the checkout counter or enter card details online and make a purchase. It’s essential to remember that while debit and credit cards have similarities, they’re not the same.
A debit card is a card provided by your bank directly attached to your checking account. It provides access to funds in your account from an automatic transfer, direct deposit, mobile check deposit, or in-person transactions. When you purchase or pay a bill using a debit card, the funds are withdrawn from your account balance.
On the other hand, a credit card is a line of credit offered by banks and other financial institutions. When you use your credit card, you’re essentially borrowing on that credit line with a promise to repay (with interest).
Debit And Credit Card Misconceptions
Assuming that debit and credit cards are the same isn’t the only misinformation consumers believe. Here’s a look at some of the most common misconceptions dispelled.
- Debit Cards Aren’t Secure – Some consumers believe that debit card transactions aren’t secure. They assume that you’re simply out of luck if there are fraudulent payments on your card. Well, that’s far from the truth. There are protections in place for debit card holders. You have a four-digit pin and microchips now embedded on debit cards. Not to mention, if you report fraud to your bank, they will offer payment protection and investigate the matter.
- Credit Cards Equate to Debt Problems – There’s a common misconception that if you have a credit card, it’s only a matter of time before you fall into debt. That’s simply not the case. Credit cards can be instrumental in helping to enhance your finances when used responsibly. As long as you keep the balance below 35%, only spend what you can afford to repay, and pay your bills on the due date, you should have any issues.
- Debit Cards Don’t Offer Rewards – Credit cards are known for the many perks and rewards offered to cardholders. You can get cash back or points towards airline miles and big-ticket items. The assumption, however, is that debit cards don’t offer these same advantages. While that may have been true years ago, things have changed. Many banks and financial institutions offer rewards programs for cardholders that are equal and, in some cases, better than credit cards.
When To Use Debit or Credit Cards
There are scenarios in which using a debit card is better than using a credit card (and vice versa). How do you know when to use which card? Check out these scenarios listed below.
- Accessing Cash – When you need to get cash fast, using your debit card is ideal. A debit card allows you to withdraw funds from your bank account using an ATM. While some credit cards come with PINs and cash options, they will cost you more in the long run. You’ll pay ATM fees, processing fees, and interest until the payment is repaid.
- Avoiding Merchant Fees – Some organizations will charge consumers a fee to use their credit cards. Although the charge is small (1-4%), it still adds up. Remember, every time you make a transaction with a credit card; you’re on the hook for interest payments. Not to mention, it defeats the purpose of a cashback offer. In this scenario, your debit card is the better option.
- No Cash Upfront – If your bank account balance is less than what you need to pay for a product or service, using your debit card will cause an issue. You’ll either overdraft your bank account or have your transaction declined. For instances like these, it makes sense to use your credit card.
Most consumers have a debit and credit card in their possession. They provide a convenient way to complete transactions online and in person. Debit and credit cards are safer than having cash and are accepted by service providers worldwide. Although they share many similarities, consumers are encouraged to know the differences between credit and debit cards to avoid mismanaging their finances and credit. Hopefully, this has shed some light on those differences and given you an idea of when each card is most sufficient.
