Debit Card vs. Credit Card: What’s the Difference?
Most Canadians can differentiate between a debit card and a credit card. But while these two commonly used payment tools might look similar in appearance, each has its distinct advantages and drawbacks. In this article, I explain the differences between the two, so you can know when it’s better to use one over the other.
What Is a Debit Card?
A debit card is a convenient and secure payment card that allows you to access your bank account, make purchases, and withdraw cash seamlessly. When you use a debit card, the funds are drawn directly from your checking account. For this reason, your debit card spending limit will never exceed what’s available in your bank account.
Benefits of Using a Debit Card
Debit cards are widely accepted, making them an incredibly convenient tool for daily use. Most debit cards also have security features that protect your funds and personal information, making it a safer way to transact than carrying around large sums of cash.
What Is a Credit Card?
A credit card is a popular payment tool that allows you to make transactions and purchases on credit rather than using your own money like a debit card. When you apply for a credit card, the credit card issuer will assign a pre-determined limit. You can then use the card to pay for goods and services within your credit limit and repay the borrowed amount.
Credit cards have an interest-free grace period, usually between 21 and 25 days. As long as you repay the full balance during the grace period, you will not be charged interest. If you have a balance owing once the grace period has expired, you will be charged interest at the pre-determined rate. Most credit card interest rates are very high, often 20% or more.
It’s essential to pay your monthly credit card bill on time to avoid any penalties and maintain a healthy credit history.
Benefits of Using a Credit Card
One of the main advantages of using a credit card is the opportunity to build your credit history. By making timely payments and staying within your credit limit, you demonstrate to the card issuer and credit bureaus that you’re a responsible borrower. This, in turn, helps to improve your credit score, making it easier to secure loans and other financial products.
In addition, credit card companies also provide cardholders with some level of protection against unauthorized transactions, making it safer to use for online shopping than a debit card.
Some credit cards offer other benefits, like reward points. You earn points as a percentage of your spending and can redeem them for travel, cash back rewards, gift cards, merchandise, statement credits, entertainment, etc.
There are three main credit card types in Canada: Visa, Mastercard, and American Express. While most credit cards charge an annual fee, there are several no-annual-fee credit cards available from various providers.
When to Use a Debit Card
Here’s a closer look at some instances when you may want to use a debit card instead of a credit card.
When Making ATM Withdrawals
Debit cards are well suited for ATM cash withdrawals since the funds are directly taken from your chequing account. Many financial institutions have fee-free ATMs for their customers, which makes debit cards a cost-effective and convenient option for accessing cash.
While you can make an ATM cash withdrawal using a credit card, it’s not recommended. That’s because the transaction is considered a cash advance. Unlike with regular credit card purchases, the interest-free grace period doesn’t apply, and interest begins accruing immediately. Also, the interest rate applied to credit card cash advances is often higher than the purchase interest rate.
When You Want to Avoid Using Credit
Debit cards are a great alternative to credit cards, especially if you want to avoid accruing credit card debt. When you make a purchase with a debit card, you are spending your own money, which can help you stay within your means. If you’ve had issues with credit card debt in the past, sticking to your debit card is a smart choice.
When to Use a Credit Card
If you have the discipline to use a credit card without overspending, there are some significant advantages to doing so, including earning rewards.
When You Want to Earn Rewards
Credit card companies offer rewards programs to attract and retain customers. With a premium rewards credit card, you can earn reward points when you make purchases with your card. You can then redeem your points for cash back, travel rewards, merchandise, etc.
Depending on your spending levels, you can earn hundreds, if not thousands, of dollars in rewards annually. Most debit cards do not have a rewards component, and the few that do aren’t that valuable.
When You Want to Build Credit
Your credit history can affect loan approvals, mortgage applications, and rental agreements. Using a credit card responsibly can help you establish and build a good credit score. Credit card issuers report your payment patterns and utilization to the credit bureaus, which then determine your credit score.
By paying your credit card bills on time and keeping your credit utilization low, you can strengthen your credit and demonstrate your trustworthiness to future lenders. Using a debit card has no impact on your credit score, positively or negatively.
When You Want Superior Fraud Protection
Credit cards offer better fraud protection compared to debit cards. In the case of unauthorized transactions, a credit card can shield you from liability and protect your funds more effectively than a bank card.
With the number of online transactions occurring these days, there is an increased risk of Phishing and identity theft, making this added security even more critical. Debit cards typically do not have the same levels of protection. If money is fraudulently withdrawn from your bank account, it’s up to you to prove it and get the money back from your bank. While this is possible, the process can take time.
Debit Card vs. Credit Card: Final Thoughts
Ultimately, the choice between using a debit or credit card comes down to your personal preferences and financial goals. By understanding the main differences between the two, you can confidently use both types of cards in a way that benefits you the most.
Just remember to spend responsibly and stay on top of your finances to make the best use of your debit and credit cards.
Which is safer for online purchases, a credit or debit card?
Credit cards are generally considered safer than debit cards for online purchases. This is because, with a credit card, the card issuer fights to get its money back in case of any fraudulent activity, while in the case of a debit card, you must fight with your financial institution to get your money back.
Not only that, but credit cards often have more protective policies against unauthorized charges. Regardless of which payment method you choose, always exercise caution and use known, secure websites.
How does a Visa Debit card differ from other debit cards?
Visa Debit cards work like regular debit cards, allowing you to spend money in your bank account. However, they also have the added benefit of being accepted by most merchants that accept Visa credit cards, both online and in person.
And Visa Debit cards often have additional security features and global customer assistance if you require help with your card. Overall, Visa Debit cards are more versatile than regular debit cards.
Are there different types of debit cards and credit cards?
Yes, there are various types of debit cards and credit cards available to suit your personal financial needs and preferences. Some institutions have debit cards that allow you to earn reward points and other benefits.
Credit cards also come in various types, including low-interest, cashback, rewards, travel, student, secured, and store-specific cards. Each type of credit card caters to specific financial goals or customer segments. While choosing a card, consider factors like your spending habits, the credit limit, interest rates, and reward options that align with your needs.