Understanding Cards

For most people starting out in their financial life, cards all look the same. You either insert them or swipe them, run their numbers or hand them to a cashier. It’s a simple, fast process that has revolutionized payments and the speed of our transactions, both public and private. It’s not confusing until you get asked: is that a debit or a credit card?

If you’ve never encountered the differences, it can seem a pointless distinction. But in fact, credit and debit cards are quite different and have different uses and capabilities. One works where the other doesn’t, and vice versa.

So what are the differences?

First and foremost: the payment mechanism. Debit cards automatically deduct money from your existing bank account. You can only spend what you have in your account, and it’s instantly transacted, much like cash. A credit card allows you to spend based on your credit, to be paid at a later date. With a credit card, you’re able to purchase with money you might not necessarily have. This can be a terrific thing for large purchases, but can cause problems if not handled well (more on that later).

Most people have both a debit and credit card, though what they use them for can vary immensely. Both debit and credit cards have 16-digit numbers, expiration dates, magnetic strips, and EMV (Europay, Mastercard, and Visa) chips. Most places are equipped to take both debit and credit cards, though they might offer different rates or benefits depending on payment methods chosen. While both cards have different kinds of protection and use rates, many people have regimented uses for their cards and keep to a schedule for them.

Credit cards are issued by financial institutions, commonly banks. The credit card enables the user to borrow money from that institution, to be paid back later with interest. The terms are set by the lender and agreed to when signing up for the card. Different lenders have different rates and terms, so be sure to look out for differences and interest rates than can become onerous the more the card is used.

What Are the Upsides and Downsides of Each Card Type?

In the past, the biggest benefit to a credit card was fraud protection and the ability to buy larger things purely on credit without relying on existing funds in a bank. For things like groceries, gas, and bills, which rely on a due date, credit cards are able to pay the amount quickly and easily. If you’re waiting for a paycheck or other funding to come through but have necessities, a credit card is a great way to make the payment and avoid late fees, charges, or interest.

However, this can lead to problems. While few of us have the necessary bank funds to buy everything with a debit card or an instant payment, a credit card can easily become a debt trap. Many people do not use their credit cards just for necessary purchases or to avoid fees—quite the opposite. Furniture, jewelry, cars, and other items can easily get added to the purchasing list on a card. There’s a potential addictive quality to being able to buy beyond our means and pay later. Too much of this leaves us in debt, which can be mountainous if left unchecked. This can’t happen with a debit card. A debit card can only max out your existing money in your account (or give you an overdraft fee).

There are many different subtypes of credit card, including:

  • Cash Back cards
  • Student Credit cards
  • Starter Credit card
  • Secured Credit card
  • Hotel Credit card
  • Airline Credit card
  • Charge card
  • Store Credit card
  • Unsecured cards
  • Balance Transfer card

There are others, but these are among the most common and come with different uses, features, and interest rates. Many of them are self-explanatory: student credit is for students specifically, store credit is for credit in the applicable store, etc. Which card you choose depends on your intended use and how the lending institution wants to lend to you.

Credit cards also allow you to build credit history and your resulting credit score. This is a very valuable commodity in today’s world. Most places only lend to people with an approved credit score and background check. From buying a car to renting an apartment or buying a home, credit score is an integral part of our financial lives. Debit cards have no such benefits attached to them. While building credit history with a credit card is a great choice, misusing the card can damage your credit score and future borrowing ability.

Credit cards are also paid back with interest. For example, if you make a significant purchase that requires several months or even years to pay back, you’ll owe the APR on that purchase in addition to the sticker cost. With a debit card, you own the item outright and there is no interest charged on the purchase.

Standard debit cards deduct money directly from your bank account, but there are other types of debit cards:

  • Electronic benefits transfer (EBT) cards
  • Prepaid debit cards

There are typically few, if any, fees associated with a debit card, besides overdraft fees for spending more than is in your account, though some cards feature overdraft protection as a benefit or don’t allow the purchase at all if it will cause an overdraft. Credit cards, in contrast, charge a variety of fees including over-limits, annual, late payments, and a host of others including standard interest and penalties. Debit cards also now feature much more robust fraud protection than they did before, and many of them are comparable to a credit card.

Debit cards also typically do not let you earn rewards, such as points or miles, which many credit cards do. While anyone with a bank account and hewing to the lending institution’s rules can get a debit card, credit cards are reliant on approval. Bad credit or no credit history can preclude a potential borrower from being approved for a credit card. There are options for building it however, such as with secured cards, which allow you to build positive credit and eventually get approved for a better card.

Do I Need Both?

This is a tougher question to answer, as it’ll vary strongly from person to person. In general, it’s best to have more payment options than fewer. Some places only take one or the other card type, or perhaps won’t accept either (rarer now, but very possible). If you want larger purchases that you don’t have the bank funds for, you’ll pretty much need a credit card. If you want a house or a car or any type of loan, you’ll need a good credit history for most institutions to lend to you, and a credit card is a great way to build that history.

If you’re just starting out in finance and new to all of it, a debit card is a safe option that won’t rack up problems for most people using it responsibly. Few people are able to buy everything directly with funds from their bank, making credit cards largely a necessity for the majority of people in the modern world (though certainly not all). In general, credit card types can be applicable to many different borrowers; if you’re concerned about getting a credit card, you can start with a secured or student card with a small borrowing limit. For a parent with a child needing a card, these are great options for starting them out building their credit without letting them go too crazy with spending.

In many places in the world, cash is being phased out in favor of electronic or contactless payment mechanisms. A card of some type will likely be a necessity for everyone in the next few years. While they can be confusing or even intimidating at first, it’s good practice getting used to them and understanding your own spending and how to use them responsibly. It’s generally recommend to have both cards while maintaining uses for each. If you have questions, give us a call or stop by and visit to discuss the options in greater detail.