Credit and debit cards are the most commonly used method of payment worldwide according to Adyen. They are used everywhere to shop and pay for services without needing cash. However, the way that they work is distinctly different from each other, and they both provide different benefits and drawbacks.
Debit cards are simple in their design; they are directly connected to your checking account and pull money from it to pay for your purchases.
This makes debit cards good for daily use and small purchases. However, large purchases and emergencies can be hard to pay for if your bank account is low on balance.
Debit cards do not have annual fees like credit cards and don’t charge interest. They are also great at getting people to budget their expenses due to having limited spending capabilities.
Debit cards also do not usually have benefits or perks like many credit card companies provide.
Credit cards on the other hand offer many benefits. For example, getting cash back, points, and flight miles are just some of the benefits of a Chase Sapphire Reserve credit card. Other benefits that credit card companies provide are introduction bonuses, zero liability protection, and more.
Introduction bonuses, also called a sign-up bonus, are incentives to drive people to sign up for credit cards and spend your money, according to Chase. A common introduction bonus are reward points that you earn by spending money, which can be cashed out for various rewards, according to Chase.
Zero liability protection means that if someone compromises your account, whatever money they used while in control of your account will be reimbursed, according to Investopedia.
Credit cards offer a line of credit: a specific amount of money that you can spend that needs to be paid back over time. It comes with payment, which is the cost of borrowing the money; this is called annual rate percentage (APR), which is the yearly interest you pay for the money you have on your credit card, according to the Citizens bank.
There are 3 things that can happen when paying back the payment. Paying back the full payment will leave you with no interest, paying back the minimum will mean you have to pay interest on the money you have left, and paying back none of the payment will earn you a fine, damage your credit score, and your APR% could be canceled. The balance can build up and gain more interest on top of that as well.
Additionally, being on time with your credit card payments can allow you to improve your credit score. A credit score is how likely banks believe that you will pay your loans back on time.
Having a high credit score creates higher chances of getting better deals and interest rates when looking for loans for homes and cars.
Both credit and debit cards have their advantages and disadvantages. In the end, choosing between debit or credit cards really depends on your situation and what fits best for you.