According to the Federal Reserve Survey of Consumer Finances, there are about 199.8 million credit card holders in the US, as of July 2014. These individuals collectively own about 1.895 billion credit cards. Despite the widespread use of credit cards, the survey found that about 23 percent of people did not own any credit card. Similarly, various estimates suggest that as of 2012, there were 191 million debit cardholders, owning nearly 530 million debit cards.
The numbers above demonstrate that the number of debit cardholders is nearly the same as the number of credit cardholders. However, when it comes to the number of cards in circulation, credit cards win the contest easily. Interestingly, several people use their credit or debit cards without a second thought. Both cards represent plastic money and are acceptable for making payments. Despite this, there are many differences between the two types of cards.
The Credit Card – Your Calling Card in Many Situations
Credit cards enable the cardholder to pay for goods and services. Therefore, the issuer of the credit card creates a revolving account for the cardholder. The cardholder uses this account for borrowing money to pay a merchant or to take a cash advance. In return, the cardholder commits to repaying the money borrowed from the issuer.
Credit cards do not require the cardholder to repay the entire outstanding balance at the end of the billing cycle. As long as the cardholder pays the minimum amount due, the issuer continues to let the cardholder use the card for making payments. The issuer charges the cardholder interest on the continuing balance of debt. However, credit card companies generally provide a grace period of 30 – 40 days before charging any interest.
The Debit Card – A Useful Card to Have Up Your Sleeve
The debit card is a plastic payment card, also referred to as a bank card or a check card. It enables the cardholder to access the cardholder’s bank account via electronic means. Cardholders use the debit card for making payments directly from their bank accounts. When used at a merchant’s site, the debit card relays a message to the cardholder’s bank. The bank withdraws the funds from the cardholder’s designated bank account and credits the merchant’s bank account.
When charged, credit cards transfer the funds to the merchant’s account. Thereafter, the cardholder repays the amount to the credit card issuer. In debit cards, the bank transfers the amount to the merchant’s account immediately. Debit cards also double up as ATM cards. Thus, they enable the cardholder to withdraw cash from their account too.
Having the Cards Stacked Against Each Other – The Difference Between Credit and Debit Cards
Despite being similar in many ways, there are several differences between credit and debit cards. When you use a credit card, you are actually borrowing money from the issuer of the credit card. In other words, you are taking money on credit from the bank or financial institution that issued the credit card. The bank pays the merchant. By signing up for the credit card, you committed yourself to repaying the bank any sum you borrowed as well as any interest component due. Debit cards, in contrast, work like electronic versions of checks. They enable you to make payments faster from your bank account.
Credit card companies operate under rigorous liability laws. For example, in case of credit card fraud, the law restricts the cardholder’s liability to $50. In addition, if you notice an incorrect or fraudulent charge on your credit card statement, you can send a written request to the issuer of the credit card within 60 days. On receiving the request, the credit card issuer would have to investigate the suspicious charges.
On the other hand, if you come across suspicious charges on your debit card, you have to report them within two days of noticing these charges. If you manage this, your liability remains at $50. However, if you report these suspicious charges after two days, your liability shoots up to $500. Furthermore, if you report these charges after 60 days, your liability would amount to the entire sum you have in your bank account.
Credit cards also offer better consumer protection than debit cards do. For example, your credit card could protect you from the damage of fragile goods or the theft of goods purchased using the card. That too, within a specific period after the purchase. Moreover, some credit cards also offer various extended warranties and insurance covers. These typically include personal accident cover, theft cover etc. Debit cards seldom offer these schemes.
Another drawback of debit cards is that they utilize the funds in your bank account. In other words, your debit card will not help you build or rebuild your credit history. In contrast, if you use your credit cards responsibly, you would go a long way toward establishing your credit history. This would give you an above average credit score. Therefore, when you require fresh lines of credit, lenders would offer you credit at favorable terms i.e. low interest rates, low fees etc.
Other differences between credit and debit cards are:
- Credit card companies charge an interest on the outstanding amount borrowed, while debit cards do not offer credit, hence there is no interest payable.
- Credit card companies provide credit for a specific limit, which the cardholders could increase or decrease from time to time while, debit cards enable the cardholder to spend up to the balance they have in their bank account.
- Because of the liability laws, credit cards provide less of a risk to the cardholder in case of frauds, while debit cards are riskier because they are linked directly to the cardholder’s bank account.
- Credit card companies allow cardholders the overdraft facility, while charging a low fee for this service, while debit card issuers charge high overdraft fees from their cardholders.
- Credit cards are not necessarily connected to a bank account, while debit cards are connected to a checking or a savings account.
The Trump Card – Which is Better – the Debit Card or the Credit Card and Why?
You need to consider various factors for assessing which of these two cards is the best. Some places only accept credit cards, while others only accept debit cards. Therefore, the places you frequent would play an important role in helping you determine which of the two cards works best for you.
When you need to pay for small purchases like gas, groceries, eating out etc., using a debit card is worthwhile. Similarly, you might be better off making bigger purchases like home appliances and electronics with your credit card. Therefore, the predominant categories of expense would also be useful in assessing the value you get from both kinds of cards.
Using your debit card would save you from having to pay any interest. It would also help you avert the possibility of accumulating a massive amount of debt. However, your debit card would not boost your credit report. Nor would it give you perks like extended warranties, better protection from fraud etc.
Therefore, as both cards have their pros and cons, consider using your credit card if you:
- Shop online frequently
- Are making large purchases e.g. home appliances, electronic items etc. or,
- Are traveling or are on vacation
At the same time, use your debit card if you:
- Need to pay the other party immediately
- Want to stick to your budget (or live within your means without taking on too much debt) or,
- Tend to shop impulsively with your credit cards
Undoubtedly, credit cards offer more features and benefits than debit cards do. However, the card that works for you would depend on your specific situation. For someone who can handle the responsibility of a credit card without going overboard, a credit card is a handy tool. On the other hand, if you have the tendency to splurge, a debit card could be beneficial. It could help you develop greater financial discipline. Essentially, both kinds of cards are tools. They serve to make your life convenient. You might find that one type of card creates more issues than it resolves. In this situation, the other type of card might be the one that is most suitable for you so, choose wisely.
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