Making a decision on which type of card to use when making a purchase can be confusing. This is especially true if you’re not familiar with the differences between credit cards and debit cards. In this article, we will break down the key similarities and differences between these two types of payment methods. We will also provide some tips on deciding which one is right for you.
What is a Credit Card?
A credit card is a card that allows you to borrow money within a pre-agreed facility to pay for goods and services. While a credit card and debit card look almost identical, each is the same size, with a 16 digit number on the front, an EMV chip, a magnetic strip and a three-digit security code. While they may look similar, each has its own distinct use.
A debit card allows you to spend the funds you have deposited in your bank account. A credit card allows you to borrow money from your credit card issuer through purchases, cash withdrawals or by transferring a balance from another card issuer. Simply put, a debit card allows you to spend your own money, and a credit card allows you to borrow money.
As mentioned above, a credit card is the physical representation of a lending facility agreed upon between yourself and a financial institution. The facilities attached to a credit card are a form of revolving credit, allowing you to borrow and repay as needed, within an agreed limit, much like an overdraft.
A credit card can be used similarly to a debit card to fund purchases in a store or online. Some card providers also allow cash withdrawals, although these may come with higher interest rates than those charged on purchases.
What is a Debit Card?
A debit card is a payment card that allows you to spend the money that is held in your bank account. Debit cards allow instant, often contactless payments, with no charge to the account holder.
A debit card is a card that lets you spend the money in your bank account. That’s it! You can put money into your account from your sources of income, such as your monthly wages from your job, any government benefits you receive, or gifts, like birthday money, and you can make purchases both in a physical store and online using the card details.
Unlike a credit card, a debit card withdraws money you already have saved from your current account or savings account, so there’s no borrowing involved and no interest fees to worry about.
What are the similarities between a Credit Card and Debit Card?
Interestingly, while credit and debit cards are two different cards and have two different purposes, all while operating in independent ways, there are some similarities you’ll want to be aware of.
- Both types of cards allow you to withdraw cash instantly from an ATM. It doesn’t matter where you are, if you have your card and PIN, you can get cash in hand quickly and easily.
- Both credit and debit cards allow you to shop online quickly, safely and securely. You can use your card details to make a purchase on any website that accepts credit or debit cards as a form of payment.
- They are both a fast and convenient way to undertake financial transactions. Of course, this depends on your card provider, but some may allow you to enjoy benefits, like an overdraft limit, cash back on certain purchases, and possible reward, loyalty, or discount points that can be redeemed for future use.
- Approval for both a credit card and debit card may be subject to passing the credit score requirements of the card issuer. However, debit cards tend to be much easier to be approved for as they don’t offer borrowing facilities.
- Making payments using either card type will usually be backed by fraud protection from your card provider. This means that if your card is lost or stolen, you may be able to get a refund for any unauthorised transactions. Additionally, both credit and debit cards may offer extra security features, like contactless payments or chip and PIN protection.
Further reading – why not check out our credit card authorisation form templates.
What are the differences between a Credit Card and Debit Card?
Aside from the above, there are differences in how credit and debit cards work, and you’ll want to be aware of these to ensure you’re using the right kind of card when you carry out specific financial processes and transactions throughout your life.
Difference between a credit card and a debit card
- A credit card provider will charge interest on transactions, whereas there is no charge for payments made through a debit card.
- Credit card providers often charge an annual fee for managing your account, whereas debit card providers don’t.
- Qualifying for a credit card may be more complex than for a debit card due to higher minimum eligibility criteria.
- Credit card providers offer higher levels of consumer protection than those offered when paying by debit card.
What are the advantages of a Credit Card?
A credit card has several benefits, including the following;
- A credit card allows you to build your credit history, assuming you pay your bill on time each month. The process of borrowing and repaying funds on time will improve your credit score and could lead to cheaper borrowing in the future, such as on a mortgage, secured loan or bridging loan.
- Most credit cards offer a 28-day window before interest is charged on purchases. When well-managed, you can improve your cash flow management by utilising this interest-free credit.
- Under Section 75 of the Consumer Credit Act 1974, your credit card company is jointly and severally liable for any breach of contract or misrepresentation by a retailer or trader. This means that if an issue arises with something that you purchased using a credit card and the retailer is unwilling to help; you may be able to claim a full refund from your credit card provider.
You’ll be given a credit limit when you take out a credit card. This is the maximum amount you can spend on your card in any one month. You can usually choose to increase or decrease this limit, although some credit card providers will automatically review and adjust your credit limit periodically.
You will also need to be aware of some of the dangers of taking out a credit card. These include the following;
- It can be all too easy to overspend when you have a credit card, as there is no immediate consequence to your spending and the credit card authorisation process is simple. This can quickly lead to debt problems, so you must keep track of your spending and ensure you don’t exceed your credit limit.
- Credit card providers will charge fees for things like missed payments, going over your credit limit or withdrawing cash from an ATM. These fees can quickly add up and make it challenging to repay your debt.
- If you don’t repay your credit card bill in full each month, you’ll be charged interest on the outstanding balance. These rates can be very high, so it’s important to try and avoid them where possible.
When it comes to taking out a credit card, it’s so important to make sure you’re shopping around to find the best deal and that you fully understand the terms and conditions before you sign up. Be sure to compare different credit cards to find one with low-interest rates, no or low annual fees and a credit limit that suits your needs.
What are the advantages of a Debit Card?
Debit cards come with their own benefits, including:
- As debit cards simply allow you to spend your own funds, they can help you to avoid debt. Using only a debit card can help you to avoid the temptation of overspending and being unable to settle your credit card bill.
- When spending on a debit card, there’s no need to worry about settling the bill when it comes as the money comes straight out of your bank account. This makes managing your finances simple and saves time.
- As you’re not borrowing money, debit cards can help you to avoid interest charges and improve your financial wellbeing as a result.
- While many credit card providers charge an annual fee for holding an account with them, debit card providers usually don’t.
Debit cards provide a convenient way to spend your own money without worrying about interest charges or annual fees. They can also help you to avoid debt, as you’re only spending what you have in your account. This makes them a popular choice for those who want to keep their finances in check.
What’s more, as debit cards are linked directly to your bank account, they can also be used to set up direct debits and standing orders. This can automate bill payments and make it easier to stay on top of your finances.
Nowadays, especially with the rise of fintech, plenty of platforms and apps can help you manage your money efficiently. From budgeting apps to those that offer interest on your account, there are plenty of options available. Since you can link your debit card to these accounts, you can do everything automatically, making it so much easier to manage your money.
Is it safer to use a credit card than a debit card?
Safety is one of the most important features of credit cards as they offer more consumer protection than debit cards. This is because your credit card provider is legally jointly responsible for any breach of contract on your purchase, so if the retailer failed to live up to their end of the deal, your credit card provider is liable and will usually offer a full refund.
However, this doesn’t mean that debit cards are unsafe. When using a debit card, you are protected by the Direct Debit Guarantee, which means that you can claim your money back if an error is made with a direct debit payment. You’re also protected against fraudsters as long as you report the fraudulent activity to your bank, typically within 13 months of it taking place.
In the UK, there are also several voluntary schemes in place that offer protection for debit card users. For example, Mastercard’s Zero Liability policy means that you won’t be held responsible for any fraudulent activity on your account, providing you report it to them in a timely manner.