Debit Cards Vs. Credit Cards

debit cards vs credit cards

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’s just one consideration of debit cards vs. credit cards. 

How Debit Cards Work 

When you make a purchase using your debit card, you’re 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. 

Because items are paid for right away, you’ll 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’s 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’ll 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’re 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’s important to be in a position to pay off your purchases in full before interest is imposed upon the transactions. 

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’s otherwise a risk of the borrower defaulting on those debts. 

So, Which 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’ll 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’ll also encounter fewer fees with debit cards. 

Bottom line, if you’re good at paying your bills off every month, you’ll get a lot more benefits out of a credit card — but the risks are higher as well.

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