Debit vs Credit: What’s the Difference?
When it comes to personal finance, one of the things that you need to choose between is debit and credit. Debit vs credit is one of the biggest debates in the personal finance community, and the benefits and drawbacks of the both mean that most people either end up in one camp or the other.
But if you are just starting your personal finance journey, then you may not actually know what the difference is between debit and credit. If so, you are in the right place because, in this guide, we’re taking a look at debit vs credit, and what the difference is between the two.
So if you want to find out more about the difference between debit and credit, keep on reading!
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What are Debit Cards?
First things first, what is debit? Well debit refers to debit cards, and debit cards are cards that are connected to a current account that holds your own money. The money that is in this account is completely owned by you, so when you spend money on the card, you are actively spending money from your account.
Debit cards typically allow you to spend money via chip and pin payments at card machines, with online retailers, over the phone, and they also allow you to withdraw money from an ATM. The maximum amount of money that you will be able to spend on your card will depend on the amount of money that you have in your account. Once you spend the amount of money that you have in your account, then you will be unable to spend anymore.
The only exception to this is if you have an overdraft on your account. If you have an overdraft, then this means that you are essentially given credit by the bank. This credit will have a limit, and you will likely pay interest on your overdraft as you repay it. If you do not have an overdraft (and many debit accounts don’t), then the only money you will be able to spend is your own money.
What are Credit Cards?
In contrast, credit cards work on the basis of credit. Credit is money that you do not own, instead this is money that you borrow. When you apply for the credit card, the bank will assess your creditworthiness, and from this they will decide the maximum amount that you are able to borrow. This figure will be the upper limit of your credit card.
Credit cards work similarly to debit cards in the ways that you can use them. They are essentially used in the same way as debit cards, and are compatible with online purchases, phone purchases, physical purchases and cash withdrawals too. The simple difference is that you will be borrowing money every time you use your credit card, rather than spending money.
With credit cards, the maximum amount that you are able to borrow will be the amount of credit that the lender has extended to you. There is very little room for maneuver with this, and you will be required to pay back all the money that you have borrowed, plus interest.
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What’s the Difference Between Debit and Credit?
So what is the difference between debit and credit? Well, you’ve probably already started to understand the difference between the two simply by looking at what debit cards and credit cards are. But let’s take a closer look.
Well, the key difference between debit and credit is whose money you are spending. When you spend money on your debit card, you are spending your own money. You will not need to repay the money, you are simply spending money that you have earned in return for a product or service. Whereas, if you purchase something on a credit card, you are borrowing that money, and in return for the product/service, you will need to re-pay that money in line with your credit agreement.
If you pay cash for something, then that is it, the payment is done and dusted, and you don’t have to worry about it again. In contrast, if you pay for something using credit, you will need to re-pay that money with interest added. You will typically make a fixed payment back to the lender every month to repay the money that you have borrowed, with interest added. But you can also re-pay it early or in full too.
Of course, there are some other differences between the two, including the amount of money that you are able to spend in one transaction, and perks. Typically, credit cards will come with more perks than debit cards, but in order to get these perks, you will be required to borrow money.
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Debit: Pros and Cons
Here are some of the pros and cons of using a debit card.
Convenient to Use - These cards are widely accepted across most retailers so they are easy to use.
Helps with Budgeting - Debit cards ensure that you only spend your own money, and this can really help when it comes to creating (and sticking to) your budget.
No Interest - As long as you do not use an overdraft, then you will not be required to pay any interest on money spent on your debit card.
Restrictions - You are restricted by the amount of money that is in your account when it comes to spending.
Credit: Pros and Cons
Here are some of the pros and cons of using a credit card.
Fraud Protection - Due to the credit agreement, you are better protected against fraud when using a credit card than when using a debit card.
Build Your Credit Score - Every time you use your credit card, and repay the money you owe, you will be helping to build your credit score.
Perks - Often, credit cards come with a variety of perks including discounts, cash-back offers, and lots more.
Easy to Overspend - It is really easy to overspend on a credit card, and end up in debt because you have lost track of the amount you have spent. That is without considering interest.
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In short, the key difference between debit and credit is where the money comes from. When you spend money on a debit card, you are spending your own money. Whereas, when you spend money on a credit card, you are borrowing money which you will need to re-pay.
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Thanks for reading!