Credit Cards vs Debit Cards
Credit cards are typically issued by financial institutions, such as banks. A credit card allows its user to borrow money from the issuer, and use it for transactions. If the money borrowed exceeds the grace period, the debtor has to pay back the debt with interest.
Credit card companies usually have aggressive marketing strategies to lure in customers. Sometimes there are sign-up rewards that are used. These rewards act as barriers. They prevent the potential user from looking into the penalties and high-interest rates. Credit cards are also glorified on tv by various celebrities. This pulls in a huge pile of users and brings millions to the industry in the form of interest rates alone.
Pros and cons of credit cards:
The interest rates:
Revolvers always are in revolving debt; hence the name. This type of credit card user brings the most profit to the issuers. Late payments, constant penalty charges and a down spiraling credit history consume these users whole. These are the ones who suffer the most from credit card interest.
However, some credit cards don’t come with interest at all. Keep in mind that the interest rate depends on the type of credit card that is in use. Although these special cards have their own benefits, they usually have a low spending limit. This restricts its users from spending more money. This may be a useful feature for teens who love shopping because it keeps their spending habits down. But for adults who make huge transactions such as giant TVs and sometimes even furniture, this no-interest card is of no use.
Interest rates, though being a disadvantage for most users, can be mastered. Countless transactors exist, who pay off their debt before the grace period. These users are special because they reap the additional benefits provided by credit cards.
This includes vacation prizes, bonus vouchers and much more. Most transactors also get fraud protection from the issuer. This blocks the user’s card in case of theft.
Unlike debit cards, credit cards allow users to build up their credit history. Again, in this case, the transactors receive the most credit scores. These scores are based on credit history, low credit utilization, on-time payments, as well as penalties and fees charged. Good credit scores allow them to borrow additional loans, as they can prove that they are most likely to pay off their debt. This helps the user to get out of difficult situations or make an investment. Although it’s all a win for transactors, the revolvers face terrible credit scores and usually find it difficult to get a loan.
Many credit cards provide additional warranty on purchased products. This allows the user to exchange their defective products for new ones, or get a refund.
Unlike credit cards, debit cards use the money that the user already has in his/her bank account. Frugal consumers love using debit cards, as it allows them to spend according to their needs, knowing that there is a limit. Debit cards also have no spending limit and fees. It acts like a portable ATM, giving complete freedom to spend whatever there is in the account.
No debt and annual fee
Debit cards allow for no interest rate collection, as there is no debt involved whatsoever. This keeps users aware of their financial situation and keeps their spending habits in check. Debit cards also don’t charge any annual fees or penalties except if the user exceeds the amount of money stored in their bank account.
Other than standard debit cards, there are two types of debit cards available:
- EBT (Electronic Benefits Transfer): These cards are issued by state and federal agencies.
- Prepaid debit cards: These cards can be used by those who don’t even have a bank account. The user just needs to top up the card with a specific amount of money, after which, they are ready to use it. These are just like the NETS cards available in the market.
NO credit history
As debit cards do not involve debt, they don’t allow their users to build up their credit history. This is a huge disadvantage, and one of the reasons why youngsters with stable cash flow use credit cards instead of debit cards.
One article written by statista.com says:
“Credit card was the most used payment method in the United States in 2020, with 38 percent of point of sale payments being made by credit card. Using a debit card was the second most common payment method, followed by cash”
Credit card transactors receive fraud protection, unlike debit card users. This also puts debit cards at a disadvantage.
In fact, even other articles such as foxbusiness.com say:
“One of the biggest benefits of using credit cards over debit is the built-in fraud protection that comes when using a credit card. If a thief accesses your debit card information and steals money, the money instantly leaves your bank account, and can be difficult to get back.”
One book that I would recommend to anyone who wants to learn more about this topic is:
Although both credit and debit cards are very different, they do have some similarities. Such as the 16-digit card numbers, PINs and even the expiry dates are almost the same! And both of these cards provide top-level convenience.