While they may look similar, debit cards and credit cards work differently and can provide different benefits when you utilize them. Understanding how they work and when to use them can help you make the best decisions for your finances. Here’s a guide to help you understand each type of card and when to use them.
Debit Cards
In order to qualify for a debit card, you’ll need to qualify for a checking account. This is because a debit card allows you to directly access the funds in your checking account, enabling you to spend your own money when making transactions. Some cards can be purchased as a prepaid debit card, which can be a helpful option for those without a bank account – however, they don’t offer all the same benefits or protections as a real debit card. It’s important to use a debit card safely, be sure to check out this guide this safety tips.
There are pros and cons when it comes to utilizing a debit card. Debit cards often have fewer fees associated with the card – like no annual fees. However, you may experience an overdraft fee if you try to withdraw or use funds that are not available in your checking account. You don’t have to worry about a monthly payment schedule or forgetting to pay off the card, but these cards also do not offer rewards or cash back opportunities and the transactions don’t count toward your credit score.
Credit Cards
A credit card is a line of credit that allows you to borrow funds up to a set limit. This enables you to charge the line of credit when making the transaction rather the utilizing your own funds.
To utilize a credit card, you’ll first need to qualify for the card. This is done by reviewing your credit history, income, debts, and other factors. You’ll have a set repayment schedule, and you may need to pay interest and fees associated with the card. Using a credit card can be a great way to build up your credit history with on-time payments. However, this also means that your credit can be hurt, especially if you miss payments.
There are a variety of cards available, from a premium basic card to rewards and cash back benefits to a secured card that uses your own funds to back the line of credit. Each type of card and financial institution have different fees, requirements, and interest rates to be aware of.
Which to Use and When
It’s important to understand which card type is best to use in different situations. While there may be some exceptions, there are many situations where utilizing your credit card can help provide additional options and security. Online or recurring charges can be easier to manage and less risky if done with a credit card. These types of charges, along with big-ticket items, can also help you earn rewards if you have a rewards credit card. If you do experience fraudulent charges, the charges aren’t being withdrawn directly from your account and can make the process of disputing the charges more simple.
Credit cards can also be a great resource to have available in case of an emergency. If you don’t have the funds available immediately, using the credit card can help you have a buffer and provide access to those needed funds. Additionally, they often provide extra protections, like rental car insurance or warranties. This makes a credit card a great way to pay for hotels, airlines, and car rentals.
In contrast, debit cards also have a time and place to be utilized. Debit cards are important to enable you to get cash back at a store register or to utilize ATM withdrawals. Some small businesses charge additional processing costs when paying with credit cards to help cover the fees they must pay. To combat this, some stores only accept debit cards, but if they do accept both debit and credit, choosing debit can help you avoid those processing costs.
Both credit and debit cards can be incredibly useful and allow you to purchase things in an increasingly digital time. Understanding which card to utilize can save you money, help you earn rewards, or even help protect your money.
