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Debit Card vs Credit Card

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So what are the differences between a debit card and a credit card?

There are many, but the main distinction is whether you "pay now" (debit card) or "pay later" (credit card).

So how does each card work?

Let's start with the easy one - debit card.
  • With a debit card, the bank does not give you a credit limit. And because of that,
  • Funds are directly taken out from your bank account whenever you use your debit card, which means,
  • Purchases made with your debit card cannot exceed the balance you have in your bank account.

As for a Credit card,

 
  • The bank gives you a credit limit.
  • You are essentially "borrowing" money for your purchases.
  • Generally, banks have an interest free period of around 20 to 45 days for you to clear your debt.
  • If you don't, you'll be charged interest on what you owe.

Unless you are a careful, diligent spender, credit cards can be very expensive with interest charges and fees.

On the other hand, because of the instant access to your bank account, fraud prevention is perhaps more important when you own a debit card. Once your debit card falls into the wrong hands, your bank account is at risk and could potentially be emptied.

So there you have it - a quick guide to the differences between a debit card and a credit card.

Now let's delve in and look at some of the advantages and disadvantages of debit card vs credit card.

Advantages of debit card

Since money is directly deducted from your savings account, there will never be any trouble with debt! Debit cards are perfect for those who always find themselves constantly in debt as you can only spend money that you have.
It is easy to apply for a debit card. It usually only requires that you have a savings or current account with the bank. No credit checks!

Disadvantages of debit card

While it is hard to overspend since actual money from your bank account is being used each time you swipe your card, there can be times when you might overdraw your account. This might lead to the bank charging an overdraft fee.
Unlike credit cards, debit cards seldom have rewards programs and services.
And now we move on to credit cards.

Advantages of credit card

Credit cards allow you to use money that you don't have...YET. In other words, you can make purchases anytime, anywhere, as long as it is within your credit limit.
Credit cards can improve your credit score. Punctual payment of your credit card bills can improve your credit score, which in turn allows you to obtain better rates for other loans.

Disadvantages of credit card

Interest charges. Using a credit card is like using borrowed money and when you use borrowed money, interest charges will apply. If you don't pay your bills on time, you might end up paying more than you think for your purchases.
You are using money that isn't yours. If you don't have enough money to pay off your credit card debt at the end of the month, there is a risk that you will start building a huge pile of debt, and end up in a bad financial situation.

 


ABOUT THE AUTHOR: CHING WEI LEE
Ching Wei Lee Ching is the CEO and co-founder of iMoney, a leading price comparison website in Malaysia. Prior to iMoney, he was an investment consultant, advising clients ranging from $5 million to $500 million on investment related matters. He is also a CFA & CAIA Charterholder, two prestigious professional qualifications in the finance field. Like this article? We have some more awesome tips for you.

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