What Is a Debit Card?

Have you ever been confused about how a debit card and a credit card differ? It is rather easy to see why. Debit cards and credit cards are accepted at many of the same places and they both offer plenty of convenience by eliminating the need to carry cash. And they even look the same. However, the fundamental difference between a debit card and a credit card account is where the cards pull the money from. A debit card takes it from your banking account, whereas a credit card charges it to your credit line. In this article, I will provide a guide guide to both debit and credit cards, and flush out the key differences between the two.

What Is a Debit Card?

Debit cards offer much of the convenience of a credit card but they do work rather differently. They draw money directly from your checking account when you make the purchase. This is done by placing a hold on the amount of the purchase, having the merchant send in the transaction to their bank, and the money being  transferred to the merchant’s account. It is important to note that it can take a few days for this process to happen, and the hold may drop off before the transaction goes through.

Because money is drawn directly from your checking account, you won’t pay any interest on your purchases and of course, your credit score will be unaffected. You will have a personal identification number (PIN) to use with your debit card at eligible merchants, vendors or ATMs. However, you can also use your debit card without a PIN when making most purchases. And in the case with making purchases with a credit card, you will sign your receipt to complete the transaction.

What Is a Credit Credit?

A credit card allows you to borrow money against a line of credit, also known as the card’s credit limit. You can use your credit card to make payments, which are reflected on your bill, where the bank pays the merchant, and later, when you receive your bill, you pay the bank. Importantly, you will be charged interest on your purchases. To avoid paying these fees, don’t carry a balance over from month to month. Credit cards have high-interest rates, and your credit card balance and payment history will affect your credit score, having long-lasting implications on your financial future.

Debit Cards vs. Credit Cards

Debit cards make it more difficult to overspend because you are limited to only the amount available in your checking account. Whereas, with a credit card, you run the risk of spending beyond your means. However, having a credit card comes with other forms of benefits. Today, most cardholders expect robust rewards and benefits when signing up for a credit card, which often include:

• Sign-up bonuses: Cardholders can often benefit from increased rewards during an introductory period, earning large rewards for a limited amount of spending.

• Cash back or points: Cardholders can often benefit from increased cash back or points when spending on different categories. For example, cardholders may earn 4x more cash back when spending at U.S. supermarkets.

• Travel: Cardholders can often benefit from travel perks. This often includes increased cash back or points when making purchases on travel, as well as no foreign transaction fees. Some cards may offer additional benefits for hotel stays, booking flights on partner airlines, or for rental car purchases.

• Brand partnerships: Cardholders can often benefit from added perks from other brands. Oftentimes, card issuers will partner with retailers or restaurants, allowing consumers to also earn rewards from these partner brands.

Conclusion

To put it simply, debit cards function similarly to credit cards, however funds are debited directly from your bank account. Credit cards, on the other hand, allow you to borrow money against a line of credit, and you risk paying interest fees if you carry a balance over for month to month. While credit cards, when used responsibly, serve as an important way to build up credit while still making the purchases that you need, debit cards are great for managing your money and helping you live within your means.