New to the ‘adulting’ world? We have got you covered. In this article, we expand upon the basic differences between credit cards and debit cards. Both these cards have similar features and serve the same ultimate purpose, which is financing your transactions. Figure out what type of a consumer you are and which of these cards are better suited for your financial background by understanding the basics of both these cards.
The basic definitions of these two cards -- debit cards and credit cards -- are first explained. We follow up this section by explaining the different types of credit cards. Debit cards do not have different types; rather, they are distinguished based on the features they offer to the cardholders.
We go on to explain a unique circumstance when the lines between these two cards are blurred and considered ‘synonymous’ by many consumers. This situation arises when individuals avail overdraft protection services.
We explain the meaning of this term and why consumers get confused between this service and debit or credit cards. Finally, we conclude this article with a section on which of these cards is better -- a debit card or a credit card.
What is a Debit Card?
Debit cards offer cardholders the same ultimate experience as that of a credit card, but they work differently. These cards are issued by the bank, thereby eliminating your need to pull out a cheque and fill it out in order to make a payment.
Every time a transaction is made using a debit card, the amount is directly deducted from your checking account. This is followed by a hold being placed on the amount by the bank. If the amount is large, it may take longer than 24 hours (one day) for the amount to leave your account. However, the money can also leave your account immediately. This depends on your bank entirely. For the transaction to go through, you have to enter your personal identification number (PIN) at the automated teller machine (ATM), or at the store.
What is a Credit Card?
Similar to debit cards, credit cards are plastic cards that pay for the product you wish to obtain by merely swiping the credit card and entering in your PIN. However, a credit card functions based on an entirely different system.
After using your credit card, the amount is added to your outstanding balance amount. Your accumulated outstanding balance, which is derived at the end of the month after adding up all your expenses, is sent to you in the form of a monthly credit card bill payment statement which needs to be paid.
The amount of credit you are allowed to use depends on your credit limit. This credit limit is decided by your credit card issuer after they have reviewed your credit history—past credit defaults, number of credit cards, loans under your name, credit score, and the overall misuse of credit.
Most credit card bills need to be paid within a certain time or interest will begin to accrue on the outstanding balance amount. This extended period during which you need to make your payment is referred to as the grace period, and it normally lasts for 30 days (one month).
Interest rates associated with credit cards are generally very high, and are the primary way through which credit card grantors make their money. However, the benefits that come with credit cards are greater than that of debit cards.
Types of Credit Cards
Debit cards cannot be categorized based on types, because each debit card is more or less the same. Credit cards, however, come in two distinct forms—secured and unsecured credit cards.
Secured Credit Cards: To obtain a secured credit card, you will need to pay an upfront deposit, which acts as collateral in case you miss a credit card bill payment. This type of credit card is usually provided to those individuals who have a bad past with their credit dealings. It is provided to them as a way to build back their creditworthiness and hence, it is termed as a ‘secured’ credit card.
Unsecured Credit Cards: Unsecured credit cards refer to standard credit cards that do not require the provision of any collateral for the procurement of the credit card. The standard credit card procedure (checking your credit history) is conducted to decide whether you will be eligible to receive a credit card.
There is a specific situation that debit cardholders encounter that blurs the line between credit cards and debit cards. This situation arises when a debit cardholder uses a service termed as ‘overdraft protection’.
This service is availed by some debit cardholders where, in case of insufficient funds in the debit cardholder’s account, the bank pays the amount. The debit cardholder then pays the bank back for this service, and additionally also pays for any interest that the bank charges on this protection service.
This protection service has been established to prevent debit cardholders from getting embarrassed in case their debit card transaction fails, or their cheque bounces. This service, however, is rarely used because of the exorbitant interest rates that come with it. Availing this service mostly leads to the payment of interest rates that are higher than credit card interest rates.
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