While they look the same, credit cards and debit cards trigger different mechanisms, some of which can cost you more money. While debit cards draw from your bank accounts, credit cards pull from a line of credit. As a result, credit card purchases can be more expensive under certain circumstances.
However, that is just one consideration of debit cards vs. credit cards. Below we will discuss features of debit cards compared to credit cards, with the pros and cons of each payment method.
How Debit Cards Work
When you make a purchase using your debit card, you are typically asked to verify your identity with a four-digit personal identification number (PIN). The card is usually linked directly to your checking account, from which the money to cover your purchases is deducted. Keep in mind that some checking or savings accounts may have balance minimums to avoid certain fees or restrictions, so paying with a debit card at times could put you at account fee risk.
Because items are paid for right away, you will encounter no interest charges. However, some banks do charge a debit card fee of up to $2 when you use the card to make purchases. It is a good idea to read the card agreement to determine if this applies to you.
Other fees associated with debit cards include monthly maintenance fees, out of network ATM fees, overdraft fees (if a purchase amount exceeds the balance in the account to which the card is linked) and the aforementioned transaction fees.
How Credit Cards Work
When you make a purchase using a credit card, you borrow against a line of credit. You can make purchases up to its maximum amount, at which point your transaction will be denied (and you will be charged a fee for trying to do so). This same transaction would likely be approved with a debit card — if the account from which you are drawing has overdraft protection.
On the other hand, credit card transactions are interest-free, as long as the balance is paid in full each month before the grace period ends. With that said, interest rates on credit cards tend to be higher than any other form of borrowing. It is important to be in a position to pay off your purchases in full before interest is imposed upon the transactions.
“If you are in a position where you find yourself just paying minimum payments every month, you may consider trying a debt payoff plan using the Snowball method, Savvy method or Avalanche method to help you get out of debt faster” says Dave Ramsey.
Like debit cards, a number of fees are associated with credit cards. Among these are annual cardholder fees, foreign transaction fees, cash advance fees, late payment fees, balance transfer fees and the over limit fees we mentioned above.
These costs can mount rather quickly and are added to your outstanding balance — which is subject to finance charges. Thus, it is in fact possible to wind up owing interest on interest on a credit card bill. As a result, they can get out of hand rather quickly.
Some people facing major credit card debt and struggling to keep up with monthly payments try to settle these debts for less through programs like Freedom Debt Relief. This process involves negotiating with creditors, trying to get them to accept a percentage of the original balance — the leverage being that there is otherwise a risk of the borrower defaulting on those debts.
So Which Payment Option Is Best?
When it comes to debit cards vs. credit cards, the latter can help you establish a financial history, plus they provide superior protection if the card is lost or stolen. Many credit cards also have rewards programs associated with them so you can get free flights, cash back and other incentives. Credit cards can get you extended warranties on certain consumer products and help you acquire something you need in a pinch, without compromising your financial liquidity too.
On the other hand, you will only spend what you have with a debit card — which mitigates the risk of creating insurmountable debt. While the pluses of a credit card are undeniable, the downsides can be a crippled credit history, outrageous interest payments and never-ending debt.
You will also encounter fewer fees with debit cards. And some locations like dispensaries will only accept debit cards (as ATM transactions) or cash, with no credit card options or a higher price being required.
Like debit cards, a number of fees are associated with credit cards. Among these are annual cardholder fees, foreign transaction fees, cash advance fees, late payment fees, balance transfer fees and the over limit fees we mentioned above.
These costs can mount rather quickly and are added to your outstanding balance — which is subject to finance charges. Thus, it is in fact possible to wind up owing interest on interest on a credit card bill. As a result, they can get out of hand rather quickly.
Some people facing major credit card debt and struggling to keep up with monthly payments try to settle these debts for less through programs like Freedom Debt Relief. This process involves negotiating with creditors, trying to get them to accept a percentage of the original balance — the leverage being that there is otherwise a risk of the borrower defaulting on those debts.
So Which Payment Option Is Best?
When it comes to debit cards vs. credit cards, the latter can help you establish a financial history, plus they provide superior protection if the card is lost or stolen. Many credit cards also have rewards programs associated with them so you can get free flights, cash back and other incentives. Credit cards can get you extended warranties on certain consumer products and help you acquire something you need in a pinch, without compromising your financial liquidity too.
On the other hand, you will only spend what you have with a debit card — which mitigates the risk of creating insurmountable debt. While the pluses of a credit card are undeniable, the downsides can be a crippled credit history, outrageous interest payments and never-ending debt.
You will also encounter fewer fees with debit cards. And some locations like dispensaries will only accept debit cards (as ATM transactions) or cash, with no credit card options or a higher price being required.
Cards Conclusion
Bottom line, if you are good at paying your bills off every month, you will get a lot more benefits out of a credit card — but the risks are higher as well. Decide which paying option is right for your specific transaction or series of monthly transactions.
Bottom line, if you are good at paying your bills off every month, you will get a lot more benefits out of a credit card — but the risks are higher as well. Decide which paying option is right for your specific transaction or series of monthly transactions.