Credit Card vs Debit Card

It’s easy to conflate credit and debit cards in your mind, believing that they both serve essentially the same functions. Each card is a convenient alternative to cash or cheque and both are accepted widel, and they can be used in store or online.That’s about the extent of their similarities, however.

There are crucial differences between the two cards which make them more suited for certain situations than others. This is especially true for small business owners who will be making informed purchases that directly relate to their income and livelihood. Being clear on the differences between the two is a huge advantage for anyone, but especially entrepreneurs.

In this post we’ll break down the differences between debit and credit cards: what each one is, the pros and cons of using them, and which one to choose for your purposes.

Usually issued to you by your bank or financial service, your debit card will deduct funds from your checking or savings account when you make a purchase. Debit cards offer secure, protected payments and are manufactured by the major card companies like Visa and Mastercard. They are an efficient and easy way to make payments directly from your account, thus accruing no debt to be paid off later. There are types of debit cards which offer different features: 

Debit cards are more suited to frugality. With a debit card you won’t go into debt or spend more than you can afford, because the spending amount is limited to the contents of your bank account. 

While card manufacturers usually imbue credit cards with more protection, debit cards are beginning to enjoy much of the same safety protection as they become more widely used. With debit cards, you will be alerted by your bank as soon as fraudulent spending is detected. And because the card is linked directly to your account, you can have control over how much money is in the account from which it extracts funds at any one time. 

You won’t pay an annual fee for your debit card and as long as you make transactions at your bank’s ATMs, you won’t incur any withdrawal fees. Some banks won’t even charge for transactions at any ATMs. While accruing debt is part of the deal with a credit card, your debit card will allow you to remain debt free. Impulsive shopping trips can always be curbed more easily with a debit card, being limited to the contents of your account and without charging fees will lessen the severity of any spending spree. 

Due to their simplicity, debit cards miss out on some of the features awarded to credit card users. 

Points, air miles, and cashback on purchases are all features reserved for credit cards. It’s important to consider this if you’re interested in investing in your purchases, because credit cards offer the opportunity to invest in rewards received with every purchase. 

If you hope to build up a positive credit rating with your debit card, you unfortunately won’t be able to. Debit card spending is isolated purchases, meaning there’s no possibility for you to build credit for the purposes of buying a house or other things related to your credit rating. 

While you’re free from annual fees, you may be subject to things like maintenance fees, overdraft, item returns, and transaction fees at foreign ATMs.  

Always keep an eye on your finances – with the Penta Business Account.

Issued by a financial institution, when you make purchases you are borrowing money from that institution, instead of extracting them from your personal account as with a debit card. You pay back the money you borrow with interest, entering a financial relationship between cardholder and institution. There are more types of credit cards than debit cards, and the features are mostly related to the rewards you can earn for using a credit card: 

Both debit and credit cards share certain advantages such as fraud protection, however there are more rewards for the credit card user. This is because you are investing more in signing up for a credit card, creating a mutually beneficial relationship with the issuer. 

Each credit card bill you pay on time will contribute to your positive credit rating. Keeping your balance low relative to your card limit will ultimately give you a positive credit history, which can be used to apply for loans at the bank to make bigger purchases. 

Certain cards provide insurance or warranties on items that may go beyond what the retailer offers. You may be able to earn a refund on your credit card for an item that becomes defective after the retailer’s warranty has expired. It’s also possible to receive price protection for stolen items, or receive a refund of the difference when you find the same item sold for cheaper. 

There are drawbacks to credit card use, however. Because you enter into a financial relationship with the issuer, you are required to keep up with on-time payments and to pay back with interest. Failing to do so can result in damages to your financial reputation. 

Because you’re spending money you’ve borrowed from the bank, there are consequences for failing to pay it back on time and with interest. You may put a strain on your finances and affect your budget and savings negatively if you cannot keep up with at least  the minimum payments. 

A poor credit history arises from failing to make the minimum payments and accumulating too much debt. This will result in a bad credit score which may make it difficult to take out loans, put down property payments, even in some cases applying for jobs. In Germany, your SCHUFA is greatly affected by your credit score and can result in difficulty finding an apartment to rent. 

Find out if your chosen card charges the following fees:

All of these can add up to costly extra fees on your purchases. If you imagine you will be making a lot of balance transfers or foreign transactions, you may want to rethink getting a credit card or find another issuer. 

Choosing the card that’s best is about choosing the one that’s right for you. Assess your financial situation and determine your needs: do you fly often? Do some credit card rewards directly benefit your frequent activities? Do you need a strong credit rating for later investments? If these things apply to you, then a credit card may be the best choice. 

Understanding the drawbacks and positives of both debit and credit cards will help you to make a more informed financial decision about the kind of card you need. Hopefully alongside this post you can assess your financial situation and approach this serious decision wisely.