Most shoppers have stopped using checks or carrying cash now that they can pay with plastic. However, not everyone understands the differences between debit and credit cards. These two types of payment methods may look similar on the surface, but they come with very different limitations and benefits. Mistaking a credit card for a debit card could have big consequences for your personal finances. Consider adding at least one of each card type to your wallet for a well-rounded portfolio of payment methods.
Upfront vs. Upcoming
When you swipe your debit card to pay for a meal at a restaurant or a new pair of jeans, the cost is deducted immediately from your bank account balance. When your bank account is empty, the card will be declined. A credit card has a limit on the amount you charge to it, but no money is actually removed from your bank account when you use it to pay. You will be sent a bill for your charges each month. If you haven`t budgeted your money properly, you may not be able to pay off the balance and could go into debt. A debit card isn`t a form of lending, but a credit card is a revolving loan.
Bonuses and Credits
Many banks charge for the privilege of having a checking account at their establishment. While you can still find free checking accounts, it`s unlikely that you will be receiving any bonuses or gifts in exchange for using your debit card. In contrast, nearly all credit cards come with some kind of loyalty program that rewards you with points that can be redeemed for cash or gifts like airfare. These bonuses make it worth using a credit card at least occasionally, especially for routine purchases.
Cash
Running your debit card through an ATM will reward you with cash in hand, drawn straight from your account. This can be done with some credit cards as well, but the lenders behind the card often charge extremely high interest rates for these transactions. If you need to make cash withdrawals on a regular basis, you should have a debit card to make it an affordable and easy option. Many retail stores and grocery stores also allow you to withdraw money with a debit card during another transaction. They charge you for the total amount including the withdrawal and give you cash back.
Over Drafting
One problem that comes with a debit card linked to your account is over drafting. It is possible to spend more than you have in your account if your last transaction goes over your balance before the automatic shutoff system kicks in. Withdrawing too much money leaves you with a negative account balance and steep overdraft fees. You can expect to pay about $30 for each transaction that puts you below zero. Credit cards also charge penalty fees if you exceed your credit limit, but this is harder to do if you have a healthy credit score, because most lenders will keep extending your credit.
Debt
The biggest difference between these two cards is the potential for debt. It`s very difficult to accumulate any kind of debt with a debit card, except for a few hundred dollars in overdraft fees. On the other hand, you could owe tens of thousands of dollars to your credit card company in just a couple of months if you don`t control your spending. Consider using a debit card for regular payments and keep a credit card on hand for emergencies and occasional splurges. Simply Finance can help you decide which banks offer the best deals for both cards.
