Difference between Credit Card & Debit Card
They may look similar when they’re sitting snugly in your pocket, but put them to use and they’ll behave very differently indeed. Are you clear when you should reach for your credit card and when you’d be better off choosing your debit card?
If your knowledge on the topic is little more than a few, half-remembered bullet points, let the Money Guru fill in the blanks. Let’s get started...
Debit vs credit card: as you spend
When swiped, a debit card takes money from your bank account instantly. It may take a few days to physically leave your account, but there’s an immediate check on whether you have the funds in your account or sufficient-agreed overdraft to cover your purchase. If you don’t, the card issuer will decide whether they’ll allow the transaction to go through and issue any relevant charges.
Credit card vs debit card: points to consider
- The funds
- The fees
- Your spending style
- Consumer protection
With a credit card, the money doesn’t move quite so quickly, though you could still have a transaction refused if you’ve maxed out your credit limit. Perhaps the biggest difference is that with credit cards, you’ll pay interest if you don’t pay back the money you’ve used within an agreed period of time, sometimes up to 55 days.
After this point, your interest is backdated so that you pay interest from the original transaction date and the amount you’re charged is based on your APR. If you’ve got a 0% purchase card you won’t need to pay interest on your balance for much longer – maybe months or even years, but you will need to make monthly payments of at least a minimum amount.
In contrast, with a debit card, you’re spending your own money, so unless you go into your agreed (or unagreed) overdraft, there’s no interest to pay. Definitely worth considering in the debit vs credit card debate.
Both types of plastic are widely accepted, and it is now illegal for retailers to charge a fee (surcharge) for using a credit card.
Both debit and credit cards can usually be used abroad with fees associated for doing so, though if you have a special overseas credit card without foreign exchange fees it can work out considerably less expensive.
Your spending style
As a general rule, most credit cards shouldn’t be used for everyday spending. If you’re using them to plug the gap between your income and outgoings, this could result in your debts spiralling like a magic carpet in a desert typhoon. But if you’re very financially aware and good with your money then a credit card with cashback or other reward schemes can be used to pay for everything from your lunch to the petrol in your car.. Ensure you spend what you would anyway and don’t leave a balance on the card.
Because they’re connected with your bank account, debit cards and their use can also come with perks – some offer discounts with particular retailers, for example. However, when it comes to withdrawing money from an ATM, while doing so with a debit card is usually free, withdrawing from a credit can rack up some hefty fees.
On the whole, withdrawing your own cash from an ATM with a debit card is free unless you’re using a charged ATM or going into an arranged overdraft by doing so. But if you use a credit card to make what is called a cash advance, not only could you face a fee plus high interest whether you clear your balance in full or not, but you could also damage your credit score.
You can check out the Money Guru Consumer Purchase Protection guide for more knowledge about the potential backup your card can give you.
As a starting point, it’s good to know that credit cards offer cover under Section 75 of the Consumer Credit Act. This means when you purchase or pay towards goods costing between £100 and £30,000, your card provider is jointly responsible for the transaction.They could be called upon to pay for refunds or repairs if goods don’t turn up or aren’t up to scratch if retailers and service providers go bust or won’t cooperate.
You may find that individual cards have other forms of consumer protection built in too. Chargeback is a scheme that applies to debit cards and is voluntarily signed up to by some credit card issuers, (Visa, Mastercard and Amex). This covers purchases under £100 and over £30,000. It relies on your bank to reverse a transaction which can take some time.
Credit v debit comparison: what works for you?
For some people, having a credit card is too much of a temptation to spend money or you may already have debt and adding to it would make issues worse. At the other end of the spectrum, this type of borrowing can sometimes have benefits, provided you’re managing debt wisely or clearing it completely.
You’ll likely already have realised that you need a really good credit rating to secure the very best credit card deals, but did you know your credit rating can also affect your ability to get a debit card? Those who have been declared bankrupt or insolvent can find it difficult to get access to a bank account and therefore a debit card, which is essentially a bank account feature.
How you use your credit or debit card can have an impact on how credit worthy you are judged to be by lenders. In turn, this can decide whether you have access to certain products. There’s also a lesser known third choice – a prepaid card can sometimes help those without a bank account and also offer options for those travelling abroad.