A credit card is a small plastic card issued by a bank, credit union, or other financial company which allows you to purchase goods or services on credit. The financial company usually establishes a credit limit that has the potential to increase or decrease depending on your spending habits and if you make payments on time. On a positive side, credit cards have a few advantages. In general, a credit card can be looked at as a 30-day, interest-free loan, as long as your monthly bills are paid off in full. Your credit card will allow you to begin to establish a credit history.
On the other hand, credit cards usually have high interest rates that will go into effect if you don’t pay a bill on time or don’t pay a bill at all. The interest amount accumulates over time, depending on how long it takes you to pay off the debt. Credit cards also are very vulnerable to fraud. It is important to monitor your purchase history, usually through a monthly paper or electronic statement. Monitoring helps you notice fraudulent activity. Lastly, if payments aren’t submitted on time, your credit history will be negatively affected, hurting your chances for future loans and other financial options to be issued to you.
A debit card is also a small plastic card that allows the holder to purchase goods and services, but it is usually issued by a bank or credit union. These cards are usually linked to a savings or checking account, where you will deposit funds for usage on the card.
Debit cards have several advantages that may be appealing to you! When you use a debit card, you are only allowed to spend the amount of cash that is available in your checking or savings account. (If have overdraft protection and you spend more, there may be immediate fees.) With this in mind, there is usually no need to carry cash as this is an equivalent. There are no interest rates ever associated with debit cards, due to the fact that you are spending your own money as opposed to taking a loan out with credit cards. Debit cards also have no effect on your credit history as there is no credit being used. Taking this into account, anyone who has a checking or savings account is able to sign up for a debit card, making it a viable option to consumers.
On the other hand, debit cards come with possible overdraft fees, which are put into effect if you spend more than what is in your checking or savings account associated with your debit card. If you choose a debit card, you are also required to remember a PIN number to make any transactions with the card. This PIN number must be kept confidential at all times!
Surely, several differences exist between credit and debit cards. If you have a credit card, monthly bills can be accessed electronically, or you can choose to have them mailed to you. On the other hand, debit cards have no monthly statements, which means you must keep track of your own expenses via your checking or savings account. For credit cards, there is a liability limit of $50. More often than not, you are not held liable for fraudulent activity. Furthermore, there is a lot less fraud protection with debit cards. There is a liability limit of up to $50 if you report in within two days of noticing the fraud. But your liability increases to more — or even everything in your account — depending on how quickly the fraudulent activity is reported.
Written by Joey Gangichiodo, Financial Wellness Peer Educator, December 2014. Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.