The Right Card for You: Debit or Credit?

Have you ever been confused about the difference between a credit and a debit card? It’s easy to see why. Debit cards and credit cards are accepted at many of the same places, they both offer convenience, and eliminate the need to carry cash.  Credit cards and debit cards typically even look almost identical, with 16-digit card numbers, expiration dates, and personal identification number (PIN) codes. 

But that is where the similarity ends. 

The basic difference between Credit Card and Debit Card

The fundamental difference between a debit card and a credit card account is where the cards pull the money. 

Debit Cards are directly linked to your bank account (such as a salary or savings account). When you use your Debit Card, the amount is deducted directly from your bank account immediately.

On the other hand, when you use your Credit Card, your bank extends you a loan for a certain period. When you swipe your credit card to make a purchase, the bank pays the amount on your behalf, without you having to pay money from your wallet or account at that very moment. But the same amount is charged to your credit card bill generated the next month and that is when you have to pay that amount from your own pocket. You may also have to pay a certain amount as interest as well, based on your purchase.

You probably have at least one credit card and one debit card in your wallet. The convenience and protection they offer are hard to beat, but they have important differences that could substantially affect your pocket. Here is what you need to know before you choose which to use when you need to swipe the plastic.

What is a Debit Card?

Debit cards offer the convenience of a credit card but work differently. Debit cards draw money directly from your bank account when you make the purchase. They do this by placing a hold on the amount of the purchase. Then the merchant sends in the transaction to their bank, and it is transferred to the merchant’s account. It can take a few days for this to happen, and the hold may drop off before the transaction goes through.

You will have a personal identification number (PIN) to use with your debit card at stores or ATMs. 

Some facts regarding debit cards.

• You won’t pay interest on your purchases.
• You will not create any credit history and your existing credit profile will be unaffected by debit card spending. 
• Paying with a debit card will take the money from your account pretty much immediately.

What is a Credit Card?

A credit card is a card that allows you to borrow money against a line of credit, otherwise known as the card’s credit limit. You use the card to make basic transactions, which are reflected on your bill; the bank pays the merchant, and later, when you receive your bill, you pay the bank. 

Some facts regarding credit cards are:

1. The bank decides your credit limit based on your credit history.
2. You will be charged interest on your purchases. To avoid paying interest, don’t carry a balance over from month to month. 
3. Your credit card balance and payment history can affect your credit score.

Features	Debit Card	Credit Card
Spending limits	Daily limits on spend and cash withdrawals	Monthly credit limits based on the card. Monthly and daily limits on cash withdrawals
Linked to	The cardholder’s bank account	The issuing bank or financial organisation
Bill	No bill generated. Account statement generated instead	Generated every month
Interest charged	As no amount is borrowed hence interest is not charged	Only if you haven’t cleared your bill on time
Eligibility	You can get a Debit card easily if you have a savings or current account	Have basic eligibility criteria, based on income, existing relationship and credit-worthiness.
Credit score	As no credit is taken, hence no question of credit score.	If you are consistently failing to clear your bill within the due date, it affects your credit score negatively.

What If You Pick “Credit” When You Swipe Your Debit Card?

When using your debit card, you often have the option to pick a “credit” transaction. But it’s important to note: Choosing credit won’t make your debit card act like a credit card.

It doesn’t help you establish credit history, and it doesn’t give you additional consumer protections. Instead, selecting “credit” or “debit” just determines how the merchant processes the card (and what fees it pays). It also could change the processing time: “credit” transactions might take a few days to clear, “debit” transactions hit your checking account immediately.

Choosing the Best Card for the Situation

When trying to determine whether to use a credit card or a debit card, you should be honest with yourself and your ability to handle credit. If you have spending issues, it is better to use your debit card whenever possible, to prevent yourself from falling into credit card debt.

Choosing the best card to use also depends on the purchase. Using a credit card might be the better option if you want to take advantage of credit card reward programs. But this system only works in your favour if you pay off the balance in full each month. If you find yourself carrying a balance, you may save in rewards, but you will wind up paying as much or more in interest.

If you’re trying to build up your credit score, choose to use your credit card occasionally. Making charges and paying your bill on time will create a record of responsible, creditworthy behaviour, which is reported to the credit bureaus and reflected on your credit report.

Bottom line: If you don’t have the discipline to only spend what you can pay off completely each month, stick with debit cards. Otherwise, a credit card is likely the better choice.