When it comes to personal finance, there are a lot of different options to choose from. Two of the most popular payment methods are credit cards and debit cards. But what's the difference between them? And when should you use each one? In this guide, we will explore the benefits, disadvantages and when to use credit cards vs debit cards.
Credit Cards Vs Debit Cards: Personal Finance Guide Table of Contents
What is a Credit Card?
A credit card is a type of loan. When you use a credit card, you are borrowing money from the credit card company. The credit card company will then send you a bill for the amount of money that you owe, plus interest and fees.
What is a Debit Card?
A debit card is linked to your bank account. This means that when you use a debit card, the money is taken directly out of your bank account. Debit cards do not have an interest rate because you are not borrowing money from the bank or any other financial institution.
What is The Difference Between Credit Cards and Debit Cards?
A credit card is a loan that must be repaid with interest. A debit card gets its funds from a linked bank account. When you use a credit card, you’re borrowing money from the issuer up to a certain limit. You’ll need to make monthly payments on your credit card balance, and if you don’t pay it off in full, you’ll accrue interest charges. Debit cards are linked directly with a checking account, so when you use your debit card, the funds are transferred immediately out of your account.
Both credit cards and debit cards can be used for online shopping and in-person purchases. You can also use either type of card to withdraw cash from an ATM. When you use a credit card at an ATM, you’re taking out a cash advance, which comes with its own set of fees and interest charges.
Credit cards tend to have more protections against fraud than debit cards. If your credit card is stolen, you can report it to the issuer and you won’t be held responsible for any unauthorized charges. With a debit card, if your card is stolen and used without your permission, you may have to bear the entire loss yourself.
Another difference between credit cards and debit cards is that credit card debt can be useful in building credit history, whereas debit card use doesn’t help build credit. If you have a credit card and you use it responsibly (by making payments on time and in full each month), you’ll start to build a good credit history.
This can come in handy later when you need to take out a loan for a major purchase like a car or a house. A good credit history can also help you get approved for credit cards with higher limits and better rewards programs.
So, which one should you use? It depends on your individual circumstances. If you tend to carry a balance from month to month, a credit card is probably the better option since debit cards don’t offer interest-free grace periods.
On the other hand, if you prefer not to carry debt, using a debit card might be the way to go. Just be sure to keep an eye on your account balance so you don’t overdraw and incur fees. And remember, regardless of which type of card you use, always practice good credit card habits like paying your bills on time and in full each month.
What Are The Different Types of Credit Cards?
There are two main types of credit cards: unsecured credit cards and secured credit cards. Unsecured credit cards are the most common type of credit card. They don't require a deposit, and you can use them anywhere that accepts credit cards. Secured credit cards also don't require a deposit, but they're only accepted at certain locations.
What Are The Different Types of Debit Cards?
Debit cards come in two different types: prepaid debit cards and traditional debit cards. Prepaid debit cards can be used anywhere that accepts credit cards, but you have to load them with money first. Traditional debit cards are linked to your bank account and can be used anywhere that accepts Visa or Mastercard.
What Are The Advantages of Using Credit Cards?
The main advantage of credit cards is that they offer you a line of credit. This means that you can borrow money from the credit card issuer up to a certain limit in order to make purchases or withdraw cash. Credit cards also typically offer a variety of other features and benefits such as rewards points, cash back, and insurance.
What Are The Advantages of Using Debit Cards?
Debit cards are linked directly to your bank account, so you can only spend what you have in your account. This can help you stay within your budget and avoid getting into debt. Debit cards also often have fewer fees than credit cards and may offer some perks such as cash back or rewards points. When used responsibly, debit cards can be a great tool for managing your finances.
What Are The Disadvantages of Using Credit Cards?
Credit cards can be expensive if you don't pay your balance in full each month. The interest rate on credit cards is usually much higher than the interest rate on a savings account or a loan from a bank.
Another disadvantage of credit cards is that it's easy to spend more money than you have. If you're not careful, you can rack up a lot of debt very quickly. Finally, credit card companies sometimes charge hidden fees, such as annual fees, balance transfer fees, and cash advance fees. These fees can add up over time and make it difficult to pay off your credit card balance.
What Are The Disadvantages of Using Debit Cards?
Debit cards doesn't offer the same protections as credit cards. For example, if you have a problem with a purchase that you made with your debit card, it can be very difficult to get your money back.
Another disadvantage of debit cards is that they offer no grace period. This means that if you don't pay your balance in full each month, you will be charged interest on the outstanding balance immediately. Finally, if you overdraw your account, you will be charged fees by your bank. These fees can add up quickly and make it difficult to recover from an overdraft.
So, Which One Should You Use?
The answer to this question depends on your individual financial situation and needs. If you are trying to build credit or want the flexibility to borrow money, then a credit card may be the best option for you. On the other hand, if you are trying to stay out of debt and avoid overspending, then a debit card may be the better choice. Ultimately, it is important to do your research and choose the payment method that is right for you.
What Are Some Alternatives to Using Credit & Debit Cards?
If credit and debit cards aren't right for you, there are plenty of other options to consider. One is cash. Using cash is a great way to stay mindful of your spending. When you physically hand over bills from your wallet, it's harder to overspend than when you're just swiping a card.
Another alternative is using a prepaid card. Prepaid cards function similarly to debit cards in that they allow you to spend only the money you have loaded onto the card in advance. However, prepaid cards don't typically offer the same rewards or credit-building potential as credit cards or traditional debit cards.
Finally, you could also use a personal loan to finance larger purchases. Personal loans can be a good option if you have good credit and can qualify for a low interest rate. However, you'll need to be sure you can repay the loan in a timely manner.
Are You Protected When Paying By Debit Card?
If you're a victim of fraud, the amount of money you can lose is capped at £50 if you tell your bank within 13 months of the transaction taking place. After this time, you could be liable for the full amount. With a credit card, there's no limit to how much you can claim back from your card provider if something goes wrong.
Paying by credit card also offers extra protection under Section 75 of the Consumer Credit Act. This means that if something goes wrong with a purchase - for example, if an item never arrives - you can claim the money back from your credit card provider. You'll need to have paid for at least part of the item by credit card to be eligible, and it only applies to items costing between £100 and £30,000.