We talked about credit cards in a different article, where we mentioned an example of you standing in front of the cashier at a grocery store. The cashier just asked “cash or card”? In the other article, we made the assumption that “card” meant credit card. However, that’s a bit of an oversimplification.
What is a debit card?
Debit cards look and act a lot like credit cards. Both are plastic (or metal) cards with a metallic strip. Both can be used in-person and online to pay for transactions. However, there is one major difference between credit and debit cards:
Debit cards are not a line of credit. A debit card is linked directly to a checking account and removes money immediately when you spend using a debit card.
If you do not have enough money in your checking account to pay for the transaction, your debit card will be declined (or “bounce”) and not complete the transaction.
There are some other less significant differences between credit and debit cards. For example:
- Most debit cards do not come with rewards points or travel benefits
- Debit cards do not have the annual fees that credit cards have
- Using a debit card will not impact your credit score or credit history
Why would someone use a credit card instead of a debit card?
If you have two cards in your wallet, a credit card and a debit card, which should you use in a given situation? The most common reason you will hear in favor of choosing the credit card is fraud protection.
A credit card provides fraud protection because you are using someone else’s money. If someone steals your credit card and uses it to buy a brand new TV, you would report that fraudulent activity to the credit card company and they will work with the police to get it fixed.
Remember, credit card companies are using their own money to pay for transactions and you pay them back later, so it’s not your money being stolen. As long as you promptly report fraud, you will not have to pay for fraudulent purchases.
Debit cards withdraw money directly from your checking account. If your card is stolen, the money will be removed from your account when that card is used. While you may eventually get this money back after filing a fraud report with your bank, it is your money that was stolen – not the bank’s money – so they may not act as quickly as you would like. Accordingly, using a credit card can be considered safer as long as you have enough money to pay off the balance at the end of the month.
Why would I use a debit card instead of a credit card?
For a lot of people, the thought of taking on debt – which is exactly what happens when you spend someone else’s money with a credit card – is very scary. Credit card debt can accrue faster than other forms of debt because the interest rates are incredibly high.
To play it safe, many individuals will not spend any money on credit cards and instead stick to debit cards. That way, they cannot spend money that they don’t have and avoid going into debt.
