These days, an average person in the UK will have at least one debit card and one credit card in their purse or wallet. They are both similar in design and in the way that they offer you access to money without having to carry around physical cash.
However, that’s where the similarities end. There are significant differences between a credit and debit card, such as the way that they work and the way they should be used
So what are these differences? And which one is better to alleviate any debt issues you may have?
A Debit Card
A debit card is almost like a digital cheque book, in the way that it allows you to draw funds from your bank account. The card is linked to your bank account and money is automatically withdrawn after use. A debit card only allows you to spend money that you physically have – your card will be rejected if you don’t have the money available to cover the transaction.
A credit card involves using money that has been “loaned” to you. The credit card company has essentially extended you credit to cover the money being spent, but you have to pay it back within an agreed time frame. If you don’t pay it back in this time, you’ll be charged a fee and interest.
Both debit cards and credit cards have their advantages and disadvantages.
With a debit card, it’s almost impossible to overspend. Overdrafts aside, you can only spend what you have in your account. As we mentioned above, your card will get declined if you don’t have the money to cover your purchase.
With a credit card, you can end up spending well above your means. When you have a significant credit card limit, it’s easy to get carried away with the spending. This can lead to paying a lot more interest over time.
Misusing your credit card can have some severe consequences for your credit score. Not only will missing payments or paying late lead to heavy interest fees, it will affect the amount of credit you can apply for in future. This can be a nightmare when later trying to apply for things such as a mortgage or card finance.
However, using a credit card can also have a good impact on your credit score. If you used your credit card properly, such as paying it off in full every month, your credit score will benefit from this. As they say, no credit is sometimes worse than having some.
A lot of people choose to open credit cards because of the rewards and benefits that they offer, things that you definitely don’t get with your regular debit card. Perks such as discounts, cash and travel points are often on offer with credit cards, which can make them very appealing to some people.
For those who know they can’t keep up with monthly repayments on their credit cards, or are likely to spend a lot more than they should, it’s definitely better sticking to your debit card. This means you won’t find yourself in debt or with hefty interest fees that you can’t afford to repay.