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Credit Cards v Debit Cards

credit cards and money
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What is the difference between a credit card and debit card?

Physically both credit and debit cards look very similar. Both are made of plastic and both fit neatly into your purse or wallet. Both have your name and lots of number on them. They are also both accepted by many online and offline stores.

The main difference between credit and debit cards is that a debit card is used to spend money held in your bank account whilst a credit card is used to borrow money from your credit card provider.

What is a credit card?

A credit card is a rectangular shaped piece of plastic that has your name, credit card number and expiry date on the front as well as some attractive pictures. A credit card allows you to borrow money up to your credit card limit.

This credit card limit is the maximum amount of money that your credit card provider is prepared to lend you based on the credit checks that they performed when you applied for the card. This limit can be anything from a few hundred pounds to thousands of pounds.

Each month you will receive a credit card statement from your credit card provider. This statement will provide a breakdown of all the dates and shops where you have used your credit card during the month. The statement will also show your closing balance.

If you do not pay off your balance in full within the timeframe set by your credit card provider then they will charge you interest. The amount of interest charged varies but can range from 0% upwards but rates around 20% are common.

Credit cards are therefore an expensive way to borrow money compared to a bank loan and should be used with caution especially if you do not expect to be able to pay off the balance at the end of the month in full.

On the other hand if you can take out a credit card with an introductory offer of 0% then it is cheaper than a bank loan but only if you can afford to repay the credit card debt in full before the introductory rate reverts back to the standard rate of around 20%.

It is best not to use the credit card to withdraw money from an auto teller machine (ATM) as they tend to charge you a cash advance fee of around 3% and charge you interest from the date you withdraw the money.

What is a debit card?

Debit cards look very similar to credit cards in that they show your name, lots of numbers and an expiry date but they are actually very different.

Debit cards are linked to your bank account and when you use your debit card to buy something you are reducing your bank balance. If you do not have sufficient funds in your bank account then it is likely your card will be declined.

As well as using your card to shop online or offline you can also withdraw money from your bank account using ATM’s so that you can spend cash instead if you wish.

Debit cards v credit cards

The main difference between a debit card and a credit card is the cost if you do not repay the credit card debt back in full each month. Otherwise paying 20% interest can really start to mount up. This is why so many people struggle to pay off their credit card debt as the outstanding balance can snowball quickly if you only pay the minimum balance each month.

On the other hand a debit card is usually free from your bank. This card allows you to spend money that is sitting in your account and so will not incur any interest. If you do have an overdraft then a debit card will allow you to spend up to your overdraft limit in which case you will be incurring interest whilst your bank account is overdrawn. Overdraft interest and charges vary from bank to bank so it is best to try and avoid overdrawing your account when using a debit card.

Credit card protection

You receive extra protection when you buy something on a credit card compared to a debit card. Section 75 of the Consumer Credit Act allows you to claim a refund from your credit card provider if the goods or services you purchased are never received or the retailer goes out of business. It also protects you if the item you bought turns out to be faulty or is different from that described in the advert. Section 75 applies to items costing between £100 and £30,000.

If you bought goods or services costing less than £100 or more than £30,000 you may still be protected if it is covered by the bank’s voluntary chargeback scheme.

Choosing the best card for you

The fees, charges and interest rates charged by different card providers can vary significantly and it is best to pick a card that suits your needs.

If you intend to use your card abroad then it is best to apply for a specialist card that has very low fees when you use it abroad otherwise you could be in for a nasty surprise when you return from holiday and receive your next statement.

Some cards offer rewards or cashback for using them. Credit cards tend to offer better rewards in general though and these can include a % of your spend, or points that can be exchanged for airmiles, vouchers and other gifts. Again, it is best to select a card that suits you as there is no point being rewarded in airmiles if you do not intend to fly.

Credit rating

A credit card can be a good way to build up your credit rating as it demonstrates that you are responsible and able to repay your credit card debt in full each month. Alternatively, if you do not repay your credit card debt in full then this may have the opposite effect.

Identify theft

Credit cards and debit cards are both susceptible to identity theft. It is important to check your bank and credit card statements thoroughly each month to make sure there are no unexpected charges. This way you can contact your provider as soon as possible to prevent any other fraudulent transactions and also to ask them to refund the charges.

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