Credit and Debit Cards: What’s the Difference?

Filed in blog, Personal Finance by on May 7, 2014 0 Comments

Using plastic is an easy, convenient way to pay for goods and services with a wide variety of merchants. While credit and debit cards may look the same, they are in fact different. Debit cards are linked to your checking account and can only be used up to the amount in there, whereas credit cards allow you to spend up to a certain credit limit that has to be repaid. The biggest difference however, is probably at the credit history level. Using a debit card will not help you build your credit score.

Credit cards

The basic premise of a credit card is that you will be given a line of credit that is expected to be paid back on a certain date. Your account will have a closing date and will be delivered in a bill that has to be paid within 22 days or more. You don’t have to pay for all of the purchases at one time, which means you can use “float” money until you are billed. The bill can be paid in whole or in part, with interest accumulating on any balance carried over. Most businesses accept credit cards and you are not require to use a PIN number at purchase. While that is convenient, it also makes credit cards a big target for thieves, who can then quickly rack up purchases before you discover the card has been stolen.

That said, you are pretty well protected against fraud, errors, and disputes. The company issuing the card will look into any and all complaints, removing the purchases until a full investigation has been performed. Any errors involving a merchant results in the money being charged back to them. Many credit cards also come with rewards attached that can be used to get cash back, buy products, accumulate travel points, and more. You can help build your credit score pretty quickly if you always pay on time and keep your balance low.

Advantages

Disadvantages

  • Easy to rack up large debts
  • The need to stay on top of all your spending activity and limits
  • High interest rates applied to unpaid balances
  • Late payments can hurt your credit score
  • Easy for thieves to steal and use

Debit card

A debit card is linked to your checking account and is basically the equivalent of cash. Any money spent on the card is removed from your account in a couple of days and sometimes immediately. It’s easy to keep track of the amount of money in your account, although it may require a little balancing of the check book. You select a PIN number that only you know, and which has to be entered at the ATM, POS, or wherever the car is used.

Errors in payment and withdrawal will not be reversed until the financial institution has investigated fully, which can often take weeks. You only have a small window of opportunity to report disputes. It costs $50 if filed in less than 2 days, and $500 in the 2-6 day range. If you wait longer than that, you are out of luck. Your PIN can be stolen and used to create fake cards by thieves. Debit cards are not considered when calculating a credit score.

Advantages

  • Pay only what you have and avoid debt
  • Easy to budget
  • Your PIN number adds a level of protection

Disadvantages

  • Not well protected in the event of errors or disputes
  • No refund until the investigation is complete
  • Thieves can steal your PIN
  • Only a small window of opportunity to report disputes
  • No help in building or establishing credit
  • Overdraft fees can quickly add up

The pros and cons of each card need to be looked at before making your final decision. You may even end up deciding that having both is a good idea. Credit cards can be used for big ticket items, especially if you want an extra layer of protection added to your purchase. Debit cards are easier to carry around than cash, although they do nothing to improve your credit rating. Both cards can get you in trouble if you overspend. In my humble opinion, use a credit card to make your purchases to take advantage of rewards and to help improve your credit history. Use it for small and large purchase only if you are good at managing your finances.  Otherwise, stick to a debit card to ensure that you don’t get yourself knee deep into debt.

About the Author ()

Pat Drummond is the author of Credit Reports Canada and considered by many to be one of the leading experts on productivity and simplicity in relation to financial planning. He started this online credit score & reporting site to chronicle and share what he’s learned in over 20 years of counseling families and individuals on debt management, obtaining loans and improving credit scores.

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