Debit Cards Vs Credit Cards: What Are The Key Differences?
Both credit card and debit cards are pretty identical, especially when it comes to their core features, functioning, and the role they play in the global economy. However, behind the scenes, there is a wide range of differences in their inner workings that can lead to varying influences on the personal finances of users and consumers.
It's worth noting that they each come in a variety of different forms, features, and capabilities, depending on the issuer, user, and credit profile, among other things. While there is a lot of complexity that surrounds the technical workings of a credit or debit card, such as how the chips work, or how the numbers are allocated, among other things, we mostly focus on the things that matter most to users.
However, fundamentally, there are a few core features that differentiate between both, which all responsible consumers should be aware of. In this article, we will dive deep into these crucial components of the global financial system, to help you better discern between the same.
What Is A Credit Card?
A credit card essentially represents a line of credit, typically issued by a bank or financial institution, that allows users to spend money or draw funds that don't belong to them. The amount spent using a credit card has to be paid back, often with interest, along with a host of other fees and charges depending on the issuer, type of card, and more.
Users are charged primarily for the funds they use, and not the total credit limit, just like a line of credit, along with additional fees, levied either monthly or annually. Credit cards come in different forms, with varying interest rates, credit limits, fees, perks, and benefits, depending on the issuer, and the credit history of the user, among other things.
Beyond the standard credit cards that offer users with a line of credit for various discretionary expenditures, there Rewards cards that help in accruing points and rewards for spending at various merchants and business, followed by Premium cards which offer bespoke services such as concierges, and free upgrades, and finally the secured credit card, wherein the credit line is secured against cash deposits of the user.
Encompassing all the different shapes, sizes, and use cases, here are some core features that best define a credit card, against a debit card.
1. Source of Funds
Being a line of credit, the funds are sourced from the issuer of the card, and not from the users own balances.
2. Funds & Limits
All credit cards come with a credit limit, ascertained by the issuer based on the creditworthiness of the user.
A user cannot spend more than this limit, without going for upgrades, or applying for another credit card.
3. Fees & Interest
Credit card users will be charged an interest on the outstanding amount, often based on the average daily balance method. Apart from this, a number of fees and charges can be levied based on the usage, and other terms.
4. Credit Reporting
Credit card usage is often reported to various credit bureaus that have an impact on the users credit scores.
Ideally, not letting the balance extend past 25% of the overall limit can lead to a great credit score going forward.
5. Rewards, Points & Cashbacks
A significant advantage of credit cards is the wide range of offers, points, rewards, and cashbacks that users can avail.
Although it is widely believed that such rewards and offers are almost never worth the risks and fees, they can be valuable for discerning users who make it a point to read through the fineprint.
What Is A Debit Card?
A debit card, often referred to as plastic cash, helps users gain access to their own funds, stored either in a checking or savings account. Any amount spent using the card is deducted from the users account, hence the name ‚Debit‚. The amount need not be paid back, as in the case of credit cards, and while there are fees involved, they are quite minimal, and there is no interest charged unless users overdraw.
Consumers are protected against a whole host of vices that come with credit cards, while providing the same level of convenience and flexibility. Debit cards too come in different shapes and sizes, with features, fees, and charges that differ accordingly. There are even prepaid and debit card services that are entirely virtual, which consumers can compare and choose using the CardRates staff picks page.
Here are some core features and functionalities that best describe a debit card, when compared to credit cards.
- Source of Funds
With a debit card, the source of funds is the user's own checking or savings account, with the amount deducted each time it is swiped.
The limitations here are defined by the funds in the users account, or a predefined limitations on daily spending, imposed for safety and security.
- Fees & Interest
Since the consumer uses his or her own funds, there is no question of interest being charged. There are certain fees associated with the cards, for each transaction, and even on an annual basis, but they are quite minimal.
- Rewards, Points & Cashbacks
Debit cards rarely offer rewards or points, and even when they do, they tend to be insignificant.
Being critical cogs of the global financial system, it is a shame that most people lack a thorough understanding of these essential instruments. While we‚Äôve covered basic fundamentals and differences between credit and debit cards, consumers should do well to go through the fineprint while applying for them, to best understand their individual features, fees, and use cases.