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8 Min. Read

Credit Vs Debit Card: What’s the Difference?

Credit Vs Debit Card: What's the Difference?

If your money is kept in a bank, then it’s almost certain that you will own either a credit card or a debit card.

Whilst the two aren’t normally considered interchangeable, they are often used in the same breath.

But while most people know that there is a difference between the two, a lot of people might not know what that difference is.

It’s also common to be confused about when to use a credit card and when to use a debit card.

But what exactly is the difference when we’re looking at debit vs credit?

We’ll take you on an indepth look at the difference between credit cards and debit cards so that you can get a better grip on your finances.

Here’s What We’ll Cover:

Credit Vs Debit

Credit Cards Vs Debit Cards

Which Card is Better for Withdrawing Money?

What Is a Credit Rating?

Key Takeaways

Credit Vs Debit

To better understand credit and debit cards, it’s best to first understand the terms credit and debit when it comes to accounting.

What Is Credit?

Credit can generally be defined as a contracted agreement in which a borrower receives a sum of money which is to be repaid at a later date. This is normally with added interest.

In an accounting sense, it refers to a bookkeeping credit entry. This entry will either decrease assets or increase liabilities and equity on a businesses balance sheet.

When it comes to purchasing, credit refers to an agreement to purchase a product or service with the promise to pay for it at a later date. This process is known as buying on credit.

What Is Debit?

A debit is an accounting entry that is the flip of a credit. It is a debit entry that results in either an increase in assets or a decrease in liabilities on a company’s balance sheet.

So if a company has an income of funds, that would be called a debit. But in a banking sense, a debit can be defined as a removal of funds from a person’s account.

Credit Cards Vs Debit Cards

Now we have an understanding of the difference between credit and debit. This means we can now take a look at the difference between credit cards and debit cards.

The physical cards look almost identical. They both have a 16-digit card number, expiration dates and magnetic strips - they are actually different in a number of ways.

What Is a Credit Card?

A credit card is effectively a loan card. When you make a purchase on your credit card, your credit card provider lends you the money and places it as credit card debt.

This debt will build every time you make a purchase on your credit card until you pay the money back. This tends to be done at the end of the month. If you don’t pay the money back before the date given by the provider, then you will be charged interest for borrowing it.

Many credit card issuers will offer other features, such as rewards or the ability to build and improve your credit rating.

When to Use a Credit Card

Whenever you borrow money, a certain amount of risk is always involved.

If you are unsure whether or not you will be able to pay back the debt, then it is safer to not use a credit card. It’s always a good idea to never borrow more than you can afford to pay back.

However, if you need to borrow money and you’re confident in your ability to pay it back, then credit cards can be a very useful tool.

When it comes to borrowing money, credit cards are a much cheaper option to debit cards. This is because APR rates tend to be lower for credit card borrowing. Also, if you pay your debt back by a certain date (known as a grace period), then most providers will not charge any interest.

Using credit cards is also a great way to build your credit rating. This is helpful when it comes to you wanting to borrow large amounts of money from a bank in the form of a loan, or when taking out a mortgage on a house.

What Is a Debit Card?

Whereas credit cards work by spending money that isn’t technically yours, debit cards are the complete opposite.

Debit cards are linked to your current account where your actual funds are kept. Every time you make a payment with your debit card, your card provider will automatically place the money in your account on hold. Once processed, this money will be charged, or debited, to your account.

Normally, debit cards aren’t used for credit. This is because if you spend more than what is already in your account, you would go into what is called an overdraft.

But unlike credit cards, current account debit overdrafts are only supposed to be used for emergency borrowing. This is rather than a long-term borrowing arrangement.

Because of this, the interest rates for an overdraft are far higher than credit cards. Some providers also charge a fee for going into your overdraft.

When to Use a Debit Card

A debit card purchase with a debit card allows you to access the funds that you already have. This is a much safer form of spending than borrowing money with a credit card as you can avoid the risk of paying more than you can avoid.

If you have funds in your account and you’re not looking to build your credit rating or make use of credit card rewards, then it’s always safer to use your debit card.

However, if you do not have the needed funds available in your current account for a purchase that you need to make, then you should always consider your borrowing options.

Many people can fall into the pitfall of going into their overdraft. This is a far more expensive form of debt than using a credit card. This is because the interest rates charged for current account overdrafts are often far higher than credit cards. Some overdraft rates are charged at 39.9% APR.

This makes choosing a credit card a much safer option.

Which Card is Better for Withdrawing Money?

When you are needing to withdraw money from an ATM or an account, it is always better to use a debit card. This is because when it comes to cash withdrawals, credit card companies tend to charge fees and these can be quite expensive.

The fees are so different, that in many cases it is still better to go into your overdraft on your debit card with a cash withdrawal. This is rather than taking cash out with a credit card.

But as with anything, this differs between providers. So it’s always best to check the terms and conditions of both of your card providers. This is to make sure you are choosing the cheapest choice for cash withdrawals.

What Is a Credit Rating?

You’ll have noticed that we have often referred to a credit rating or a credit score.

A credit rating can refer to a variety of systems used to judge how credit-worth a lender finds an individual. This is done by looking at a person’s credit score.

A credit score is a specific numerical value that can change based on individual circumstances.

If you have a low credit score, it shows that you often pay back loans past their deadline. This would mean that banks and lenders would be less inclined to loan you money.

However if you have a high credit score, this means that you always pay back your loans on time. This high score makes you a more attractive option to lenders.

Credit scores are important as it can affect your ability to get loans, overdrafts and credit cards. Your credit report can also influence your ability to get things like a mortgage or finance for a car. It also affects how you can pay for utilities such as electricity and gas.

The good news is that you can improve your credit rating. By using your credit card and consistently paying it off early or on time, you will slowly increase your credit score over a period of time.

If you’ve had problems in the past, it may take time to rebuild your credit history, but it is an endeavour worth taking.

Key Takeaways

When handling your finances, it’s important to know the distinctions between your credit card and your debit card.

It is generally easier and safer to not borrow money and to stick to the funds available on your debit card. Yet using a credit card comes with some good benefits that can help you out in the long term.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks Resource Hub.