Difference of Credit Card to Debit Card – Should You Get a Credit Card?

Difference-of-Credit-Card-to-Debit-Card
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Credit and debit cards can cause a big debate in the financial world. Several financial professionals of personal finance, among them Dave Ramsey, don’t recommend a credit card to anyone. Then we have those that do. Those that tell you to leverage your debt to make more money for you in the long-run.

The truth is that there are a lot of intricacies to credit cards as well as debit cards, and figuring out which one is best for you can be a bit of a hassle. You can have both, but what I’m referring to when I say, “best for you,” is which one you use on a regular basis, how you use it, and whether it would be advisable to even have one or neither of these.

Credit cards, as well as debit cards, have their own pros and cons.

The difference of credit card to debit card is what makes one or the other more beneficial for some than for others. Depending on your level of financial responsibility, one or the other could be an advantage or a disadvantage to you.

Without further ado, let’s get into the difference of credit card to debit card and why you should (or shouldn’t) use them.

Credit Cards

To start off we have credit cards. Credit cards became popular because of their efficiency to allow people to purchase things without having money at the moment. Then, being able to pay it back later with accumulating interest.

This allowed money to flow through the economy, even if people did not have funds available at the moment.

Again, this early purchase-power is what gave them their popularity. But ironically, this isn’t the best way to use them.

How Credit Cards Work

Credit cards give you access to a line of credit from a financial institution such as a bank. What is a line of credit? Essentially, it is a preset amount of funds that a cardholder can borrow from the financial institution to either withdraw cash or purchase items.

Expenditures and repayment of debt are reflected in a consumer’s credit report. Consumers are able to raise (or lower) their credit score by having a history of their credit utilization and payments.

The higher your credit score, the lower your risk of default is, and vise versa. The term “default” simply means that you don’t make your payments on time. Higher credit scores allow you to have access to big loans to make major purchases such as a home or car.

The cardholder must agree to pay back the borrowed funds according to the institution’s terms. If the cardholder fails to follow these terms, they will have to pay interest and/or other penalties on the card. Thus, making their original expense more expensive in the long run.

Credit Cards are separated into 4 categories:

  • Secured Credit – These require an initial deposit from the cardholder for the institution to hold as collateral. This amount is given as an initial credit line. This means that if you made a deposit of $200, that will be how much you have available to borrow. Usually, this card is for people who don’t have a credit score and are starting out. These people are seen as “high-risk” of not paying back what they borrow from the institution. That is why they must provide the initial deposit. Once they have been consistent with paying back borrowed funds on time for a certain amount of time (usually 8 months), the cardholder will get their initial deposit back and have their credit line extended.
  • Standard Cards – These are the simplest cards, all they do is give a line to their users. After the initial deposit has been given back to the cardholder from a secured credit card, and the credit line has been extended, the card becomes a standard card.
  • Rewards Cards – These are as simple as their name implies. They are cards that provide you with different rewards and bonuses for using their credit-line responsibly. These rewards can vary from cashback to travel points to more reward variations. Consumers who pay off their balance in full and on time every month can profit from using rewards cards.
  • Charge Cards – For these cards, there is no preset credit limit, however, they don’t allow unpaid balances to carry over to the next month. If you don’t pay them back, you can expect to pay late fees, receive increased interest rates and incur damages to your credit score. If you continue to miss payments, your card can be frozen.

Credit cards offer high-quality consumer protection through fraud protection and warranties. They provide additional warranties or insurance above what the retailer offers for its products. For example, if an item becomes defective after the manufacturer’s warranty has expired, the credit card institution might be able to cover the defective item.

Despite these benefits, credit cards are costlier than debit cards. Several credit cards (not all) have annual fees that charge the cardholder for using their credit. They also have over-limit fees, late payment fees, and several other fees in the form of penalties for late payments.

They charge interest on unpaid balances that carry over to the next month. This interest can vary. The lower your credit score the higher your interest rate. The newer you are at using credit cards the higher your interest rate. If you pay off your balance in full, on time, every month, you don’t have to deal with these penalties and interest rates.

Also, if the card gets stolen, and the theft or loss is reported in a timely manner, the maximum liability that might be owed for purchases made is $50. Credit cardholders do not have to be immediately assessed in-depth for the charges being disputed. They usually have these charges restored immediately.

The law is more merciful to credit card holders on zero liability protection than it is to debit cardholders.

Debit Cards

Debit cards look the same as credit cards but they are very different. Debit cards make cash withdrawals and purchases by directly deducting money from your checking account.

They don’t charge any interest rates on your money and the only fees they might charge are overdraft fees and certain transaction fees like international purchase fees.

Few and newer cards can offer the convenience of credit cards and many of the same protections when they are issued by Visa or Mastercard.

However, when it comes to a stolen or lost card, debit card theft victims usually don’t get their refund until an investigation has been entirely completed. This delays the refund process and could end up losing the victim more money. Sometimes they aren’t fully refunded for their losses.

They also don’t usually extend the warranty for items past the manufacturer’s warranty. They simply act like cash. You won’t be seeing your money back if your item is defective and past its warranty deadline unless you dispute it with the manufacturer.

Debit cards come in 3 separate ways:

  • Standard Debit Cards – These are your usual debit cards. They simply deduct money directly from your checking account.
  • Electronic Benefits Transfer (EBT) – These are issued by state and federal agencies.
  • Pre-Paid Debit Cards – These give people who don’t have a bank account a way to make electronic purchases with a pre-loaded amount on the card.

People who don’t like to spend very much tend to prefer debit cards because they usually have no fees other than the overdraft fees, and certain transaction fees.

Also, newer debit cards are now providing their own version of rewards.

Institutions like brokers and banks are now giving access to newer debit cards that pay interest on the money you hold with them. Brokers do this by partnering up with banks and ensuring that the banks they partner with are insured by the Federal Deposit Insurance Corporation (FDIC). Essentially, it’s all in the banks and money market accounts to determine if and how much interest you will be given on your money.

Keep a mental note, however, that even if a bank or broker claims to be FDIC insured, it is a good idea to verify it on the FDIC website. This is because banks and other financial institutions are never really free from the possibility of lying about FDIC insurance.

Your Financial Behavior

If you want to know whether you should get a debit card, a credit card, both, or neither. You should strongly evaluate your personal financial behavior.

Debit cards eliminate the danger of racking up debt because they can be used by the holder to avoid the temptation to overspend with a credit card.

If you are someone who spends uncontrollably and is easily tempted to spend more than you have, you should most definitely not get a credit card or get rid of it if you do. If you are someone who does not manage your finances well, tend to overspend, and end up going negative on funds, you probably shouldn’t have a debit card either!

Self-control is the key. Some studies suggest that people who use plastic to make a purchase end up spending 22% more at a grocery store than people who use cash. This is because cash tends to have an emotional hit on a person’s conscience when they see those Benjamins walking away from them.

Whereas, if they pay with plastic, they’ll get that plastic card right back into their hand after the transaction has been processed. They don’t even think about the money they spend because they never physically saw it leave.

However, this behavior does not apply to all people. Although they are in the minority, there are definitely people who have a lot of self-control and manage their finances well to the point that losing money on a card causes the same feeling as losing cash. I know this because I am one of those people, but I am very well aware that this is not a very common behavior.

It most certainly does exist though. Ultimately, your personal responsibly plays a major role on whether you should get a credit card, a debit card, or neither.

Dave Ramsey on Credit Cards

Several of us know who Dave Ramsey is, but for those who don’t, there is a separate article where I explain who he is and what I think about his philosophies on credit cards.

For those who do know Dave Ramsey, you are probably well aware of his opinions on credit cards. Dave Ramsey is strongly against credit cards and does not suggest them to even the most financially responsible people. He makes this judgment from the statistics of the majority.

Such statistics prove that the majority of people will end up spending more because they will be induced by the temptation of having extra funds available. They also show that people will spend more because they will be chasing bonuses, cashback, travel points, and other rewards.

The truth is that Dave Ramsey is right. Most people shouldn’t have a credit card and most people will end up spending more because of rewards and temptations.

But what I, and several other people, disagree with Dave on is that nobody should have a credit card. I definitely believe that there are people who are able to responsibly manage their money to where they use their credit responsibly and only on expenses they would have made anyway.

This takes me to my next point…

Should You Get a Credit Card, a Debit Card, or Neither?

Here’s the thing, if you’re debating on whether you want to get a credit card. First, think about how financially responsible you are.

Here are some things to look at:

  • Do you track your funds?
  • Do you live and spend below your means?
  • Are you able to save money without a problem?
  • Do you spend based on wants or needs?

If the answer to the first three questions is “no” and your answer to the fourth question is “both” or “wants”, I would not recommend getting a credit card.

The reason credit card companies are able to make so much money and give out very nice rewards to responsible credit users is because they are able to make money from irresponsible credit users.

Total U.S. consumer debt is at about $13.86 trillion according to debt.org. This is because the majority of people are irresponsible credit users. This is how credit card companies make so much money.

But for those of you who have a strict budget, who keep track of all your expenses to the cent, who save with a purpose & invest, and who have the self-discipline to only spend what you have on what you need, I could definitely agree that you should take advantage of credit cards and debit cards.

When it comes to debit cards, if you are someone who does not manage your finances well, tend to overspend, and end up going negative on funds, you probably shouldn’t have a debit card and most definitely not a credit card.

If you are part of the group who spends 22% more when using plastic than when using paper cash, you should also avoid plastic overall. For someone like me, I personally don’t like paper cash because I’ll lose the change or want to get rid of it. That change can really add up in the long run.

If you’re going to get a credit card or a debit card, make sure you spend with them as if they were cash and only on expenses you would have made anyway.

Don’t overspend on either, don’t spend more for the sake of credit card rewards. Maintain a financial discipline and you’ll be able to reap the rewards of both.


Spread the wealth!

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18 Comments

  1. Hi and thanks for an excellent and highly informative article. I have had credit and debit cards for more than 40 years now. I very quickly learned that I absolutely loathe paying any interest so for many years now I have set up so that my credit card balance is paid off every month. And for even more years before that, I was paying it off manually anyway. You make a lot of valid points about discipline and control. However, there are other reasons for having debit and credit cards. If you travel abroad without either you are going to have a really hard time getting a hotel to accept your reservation, you will have to leave a cash deposit and for a whole host of other reasons, it is just not going to be practical without either a debit or a credit card. I do take your point that the facility that these cards offer probably does result in more purchases than I would otherwise make, however, I feel that by avoiding the interest altogether I am in some ways beating them at their own game. I have long thought that the credit card business was built on a model that relied on people going over and ending up paying interest. I always thought it was a bit like the Blockbuster video rental business, I was convinced that was also based on people forgetting they had checked out videos and ended up paying way over the odds in late fees. Sad but true, there are many businesses whose profitability is based on human weaknesses. Thanks again for a great article. I learned a lot. Best regards, Andy

    1. Absolutely! And thank you for your feedback! Yes, there are many benefits to using a debit or credit card including the point you made about how much easier it is to get a hotel when you have a card available to you. I’m glad that you’ve made it a goal to pay it in full though. That’s all you have to do to ‘beat them at their own game’ as you said. I love the way you put that because it’s very true. Unfortunately, companies like credit card companies and block-buster do rely on human weakness and it’s sad but it works for them. This is why we cannot let ourselves fall prey to their games and having a credit card that you pay in full every single month can be a huge benefit for you. I’m very happy to hear that you’re a responsible credit user, we need more people like that because too many people let themselves fall when it comes to borrowing. Wish you the best and I’m glad you found this article helpful! Thanks again for your feedback and I hope you have a great day! 🙂 

  2. Hi Misael,

    Thanks for helping us to use/not use or should have and shouldn’t have the credit or debit card or both.

    Financial education is a must for everyone not to misuse the wealth. I do have both the credit and debit card. My credit card has a reward. I don’t like to use cash or coins. I have never delayed my payment. I know at times I overspend buying grocery using plastic but it makes me really happy. I hardly spend on other items. I have excellent credit score so I could borrow money for my house on a lower interest rate. I travel internationally and get miles and at times that has given me a free ticket or upgrade to first class from economy. 

    The big thing to control is not overspend because you don’t see money leaving you.

    There are so many things being sold to attract you and sell you, sometimes it is hard to resist. As described watching your financial behavior can help you decide which way to go. Financial health is your mental health.  

    1. I agree. I also applaud you for maintaining your financial discipline with your use of credit cards! People like you are in the minority when it comes to financial success, and only a small group of people (of which you’re part of) can and should consider using a credit card. Yes, sometimes having using plastic can cause you to spend more but you mentioned that it’s only at the grocery so that’s a plus! You also already maintain a good financial discipline so you have the first part down; that only means that learning to control your spending at the grocery store should not be too hard to master 🙂 Thank you for sharing your experience and for your feedback!

  3. Hi Misael, thanks for outlining the difference between Credit Cards and Debit Cards. Really find your article helpful and agree that we as consumers have to carefully evaluate our financial behaviour in order to make the right decision to use debit or credit. I would like to ask if you have any advice to achieve and maintain financial discipline when using cards? Thanks!

    1. Of course, I’m glad the article was helpful 🙂 In regards to the advice you asked for to achieve and maintain financial discipline, in regards to credit cards, I would say that the first thing you need to do is to look at credit card funds as if they were cash. This way, you don’t spend them any different than you would spend your cash. But some people even overspend with cash which is why the next step would be to start a budget! Keep count of all your cashflows, in and out. Keeping a strict count of your money will allow you to see where you spend, where you overspend, and where you can cut back. By being able to see this, you can track how much less you can spend on certain things that have never been necessities. By cutting back on these and spending your credit card funds as if it were cash on every-day items you do yourself a big favor and promote a good behavioral financial discipline. You get the financial discipline to get the snowball rolling. But always make sure to pay your credit card balance in full every month. This way you will come out ahead in the credit card game! 🙂 Good question! I’ll actually make an article on this, so thank you for your feedback!

  4. Well! I feel that it all depends on how we choose to live, how we get our income and what our income compares to our expenditures honestly, it can be a good thing to own a credit card if it would be used in moderately in line with our needs. But when it is abused, it can cause unnecessary debts for us. However, a debit card too would also depend on the kind of income and the lifestlye we are living. 

    1. Thank you for your feedback! Yes, we must all be very careful with how we use our credit cards at all times! Even our debit ccards

  5. Hello there, we all have various behaviours when it comes to spending and I have come to understand that most people who spend money anyhow do not have an intent for the future and it’s really obvious. I completely agree with Ramsey, because there are those who at the sight of a credit card wants to start buying stuff. It’s really bad. 

    1. Yep. Sadly, financial discipline is not something that is taught among Americans. This is why so many are broke. Thank you so much for your comment 🙂

  6. Well I’ve always had the doubt about if inkmoe the different between the two but currently I have two debit cards and according to your explanation here, credits can pose a problem to people and cam also foster debt and that’s not something I’d like to have myself I to so it’s better just to spend the money I have.

    1. I’m glad that you have that level of self-awareness to determine what fits you best! I appreciate you surfing around the site! Thank you for your feedback 🙂

  7. Hi,

    From my study Debit cards allow bank customers to spend money by drawing on funds they have deposited at the bank. Credit cards allow consumers to borrow money from the card issuer up to a certain limit in order to purchase items or withdraw cash, I will prefer you get both if you have access to them but if you don’t then go for debit card.

    Thank you.

    Aluko.

    1. Even if you have access to both, it’s important to only get what you are able to manage correctly. This way you won’t go into any unnecessary debt! 

  8. Hey, what a good article here about credit and debit cards. I’ve been banking staff for many years, and I also know cards. I enjoy reading the last news about cards. I agree with you, that if someone is not a good administrator of his money, then it is better to avoid too apply for a credit card. And, the prepaid cards, I like them, a good opportunity for everyone that does not have a banking account and want to use electronic money for his online purchases. They are no risky at all. 

    Thank you for this helpful article.

    Alketa

    1. Glad this was helpful 🙂 thank you for your feedback

  9. Hi Misael, 

    Awesome post! Very well written!

    As a user of a credit and debit card for many years, I must say they each carry their own set of pros and cons. I like my debit card because it is backed by real money in my account. I don’t like to spend it if I don’t have it. But I love that my credit card allows me to make big purchases if necessary even if I don’t have it. It also helps to build credit, which will help me in the future, just by my recurring netflix and audible charges. I also like the travel benefits my credit card brings me, not just rewards, but also the no-fee currency conversion. But only responsible persons should carry credit cards, as it’s extremely easy to let get out of control!

    Thanks for the info!
    Anna

    1. Thank you for your feedback Anna! Yes, I 100% agree, only responsible users should have a credit card. That’s great that you only use it for purchases that you have the money for!

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