Credit cards and debit cards are very different from one another, even if they look very similar. Both typically have a magnetic strip, an EMV chip, an expiration date, a 16-digit number, and dimensions of 3.375 inches by 2.125 inches.
Though credit cards allow you to borrow money, debit cards take funds directly out of your bank account. What follows is a more detailed explanation of the differences between the two types of cards.
Key distinctions between debit and credit cards
When using a debit card, funds come directly from the bank associated with the card. On the other hand, when using a credit card, funds are borrowed from a line of credit issued by the card-issuing bank or credit union at a set interest rate.
The card issuer sets the interest rate, and the user is billed monthly for the amount charged to their credit card, along with any interest charges and fees.
Credit cardholders can either pay off the entire balance by the due date or pay the minimum required payment amount. If only the minimum payment is made, any balance rolled over to the next billing cycle will be subject to interest charges.
Repeatedly adding new charges to a credit card and only paying the minimum amount can lead to a cycle of high revolving debt, as interest charges can quickly inflate the overall balance, making it harder to pay off.
Cardless, a technology platform for brands to issue cobranded credit cards, advises consumers to manage credit responsibly to enjoy benefits like rewards and flexible financing options. However, it’s crucial to live within one’s means and consider using a debit card or other lending products with lower APRs if paying off a balance is difficult.
Pros of using a credit card
Using a credit card instead of a debit card has several fundamental advantages.
- Using credit cards sensibly can raise your credit score.
- the capacity to gradually finance a sizable acquisition.
- Extended warranties and purchase protections beyond those provided by retailers are available on certain credit cards.
- More secure against fraud than debit cards.
- the capacity to contest unapproved acquisitions.
Cons of using a credit card
Credit card borrowing involves borrowing money from a lending institution, which can be risky if not repaid promptly. Overcrowding can lead to debt as interest charges inflate the balance, making it harder to pay off. Regularly maxing out your credit limit or not making timely payments can negatively impact your credit score, as your account payment and balance activity are reported to credit bureaus.
Keep your credit card spending and repayment in check by following these four habits: pay your account on time, don’t charge more than you can afford to pay off each month, and prioritize paying off your debt before making more purchases.
For the sake of your credit score, it is imperative that you maintain a balance that is significantly lower than your credit limit. For a loan that doesn’t incur interest, just pay off your monthly charges.
If you habitually pay late, you should be mindful of the following fees: annual, late, overlimit, and punitive interest rates. For added peace of mind, you may set up automatic payments through your bank or credit card. Finally, if you usually pay late, you should know that there are different interest rates: annual, late, over-limit, and punitive.
