Simpler Smarter Savings

Credit cards and debit cards seem similar visually but are very different cards. Knowing the differences between the two can help shed some light on why they’re treated differently. The different responsibilities involved can affect your finances in different ways, and understanding this can help prevent problems with undesired consequences.

To put it simply, credit cards have a higher risk of fraud and default whereas debit cards need a personal identification number (PIN) and withdraw using available funds.

How Credit Cards Work

Unlike with debit cards, the majority of credit cards won’t link to an existing account. Debit cards will take funds immediately from your account, but credit cards let you buy now while paying later. Each month, you get a statement informing you how much you have borrowed and still must pay.

It is possible to pay the bill in full every month to avoid incurring interest, or you can pay a minimum amount specified by the provider, spreading the full payment of the items back over time. Note that you usually will be charged interest if you have an outstanding balance that isn’t paid off in full, which means it’ll take a little longer than planned to pay back the amount that is due.

How Debit Cards Differ

There are many types of credit card, but debit cards only take money from an existing account with available funds. That means you need to already have the money in your account or overdraft protection before you can afford to make a transaction. Sometimes, generally if there are no available funds, the transaction won’t complete.

Differences Between Credit and Debit Transactions

While debit purchases deduct from available funds, transactions on credit cards vary. Credit cards run up a bill that you’ll need to pay in the future rather than immediately.

As mentioned before, you’ll pay additional interest on a balance not paid in full by the next due date, which means you’ll end up paying more than an item would normally cost over the long-term. Because of this, it’s important to be responsible when making purchases using a credit card; before deciding on a purchase, look at your finances and see whether you can repay the full amount within the due date. If not, consider whether or not you can afford to maintain a payment plan for a reasonable amount of time; always paying the minimum each month will take far too long to pay off.