It’s easy to get overwhelmed sometimes when you think about how many financial products are out there. What do they all do? How does each one work? Which one is right for me? These are all critical questions to answer before committing to any financial product or service, especially credit cards and debit cards. And CreditNinja is always here to help you answer these critical questions. So read on to learn more about a credit card vs. debit card and what you need to know about how each of these works.
Credit cards and debit cards are two of the most common financial products on the market. If you’ve ever had a bank account, then odds are you’re at least familiar with a debit card. And many Americans use credit cards regularly, sometimes to a fault. But many details surrounding each of these things are essential to know if you’re using them responsibly.
Responsible banking and financial habits are crucial to becoming financially stable. Learning how to research and thoroughly understand financial products and services will set you up for success in the long run. Luckily, here at CreditNinja, our goal is to help you do just that.
What Are Credit Cards?
A credit card is one of the most common financial products available to consumers. Their accessibility and ease of use are two of the main reasons why most people have them. But this can also make them easy to abuse. Unfortunately, many Americans misuse credit cards and rack up thousands of dollars in debt that they will have a difficult time repaying.
A credit card is a plastic or metal card that consumers can borrow up to a specific spending limit. The credit card company allows their borrowers to spend money using the card, then repay the company. Spending limits, interest rates, and other terms will depend on the credit card companies and the borrower’s credit history and financial standing.
Essentially, a credit card is a way for a consumer to spend money that they may not have at the moment.
How Does a Credit Card Work?
The process for getting and using a credit card is relatively straightforward:
- You apply for a credit card the same way you apply for most financial products. This can be done at a bank, a store that offers them, or online.
- The credit card company reviews your application. They’ll let you know whether they will approve or deny your application, usually fairly quickly. You may even find out their decision on the same day.
- If they approve you for a credit card, they’ll either mail it to you or potentially hand you one right there if you’re at a bank or storefront.
- Now that you have the card, you can start spending. Odds are, you will have to activate the credit card, but that usually only involves a quick phone call.
- You can now spend using the credit card. You can only spend up to the credit limit that was set before your approval. Your credit limit may be several hundred dollars or several thousand. It will likely depend on your credit history and credit score.
- Now that you’ve spent money using the credit card, you’ll need to pay it back. Make sure you know when your payments are due so that you don’t incur a late fee.
- The credit card company will charge you interest on the total balance you have on the card. You can avoid paying this interest if you pay off your balance right after using the credit card or before the end of the billing cycle.
Each credit card will likely have different terms, conditions, and perks. So while the basic process is always the same (spend, repay, repeat), the details will differ depending on the card.
Credit Cards and Your Credit Score
Many Americans make the mistake of viewing a credit card as free money. It’s easy to use, and you can buy things even if you don’t have the cash on hand. It’s easy to see why so many people get into financial trouble from these little plastic cards. If you currently have a credit card or plan to start using one, make sure you completely understand the risks and rewards.
Many different things can affect your credit score and credit report. In general, sound financial practices like making payments on time and not having very much outstanding debt will lead to a good credit score. On the other hand, spending cash, you don’t have without being able to repay it is a sure-fire way to lower your credit score.
Keep this in mind when using any financial product or service. Make sure to do plenty of research and planning before jumping into any financial endeavor.
Which Credit Card Is Right for You?
You’re probably already aware that there are thousands of different credit cards out there. You may even get them mailed to you with flashy introductory offers like 0% APR for the first year. While some of these offers may be worth considering, it’s essential to be able to review them carefully and consider how they’ll affect your finances and your life.
Common offers you may see from a card issuer include:
- 0% APR or low APR for a temporary period of time
- Cashback on purchases
- Airline miles or other travel discounts or amenities
These offers can be desirable depending on your lifestyle. For example, if you have several other credit cards with high balances, you may be interested in a 0% APR offer so you can consolidate your debts. This can allow you to make payments on the total debt without accruing any more interest for a set period.
If you love to travel, then maybe a card that offers airline miles would be better. Make sure you choose the credit card that suits your lifestyle the best and has the best rewards.
The Risks of Credit Cards
While credit cards can be great tools that allow you to improve your life, they can also be very risky if you don’t use them properly. According to the 2020 American Household Credit Card Debt Study from NerdWallet, the average American household carries over $6,700 in credit card debt. This can be a difficult amount to repay for anyone.
The problem with credit cards is also what makes them so appealing: how easy they are to use and the access they give you for purchases you can’t afford otherwise.
If you spend using credit cards, you need to have a plan to pay that money off. Otherwise, you’ll continue to rack up debt until the amount is overwhelming. This will lead to your credit score lowering and could even lead to your debt being sent to a collection agency. This type of action could stay on your credit history for up to seven years.
Misusing credit cards could potentially affect your life for years to come. If your credit history suffers from it, it will lower your overall score. And if your credit score is too low, you’ll have a difficult time getting no credit check loans and credit cards in the future.
What Are Debit Cards?
A debit card, also known as a check card or bank card, has several distinctions from a credit card. A debit card is also a small plastic card, but you’re only spending money that you already have in the bank with a debit card. It’s a card that allows you to access the funds within your checking account. You can access this money by using a debit card to make purchases at a store or by withdrawing cash from an ATM.
When you open a checking account with a bank, you’ll probably also receive a debit card. Of course, you may also obtain paper checks, but debit cards are the new and improved version of these. They make accessing the money in your bank account quick and convenient.
How Does a Debit Card Work?
The process for receiving and using a debit card is straightforward:
- If you have a checking account at a bank or credit union, you can also have a debit card.
- Talk to your bank or credit union about receiving one when you open a checking account. They may provide it for free, or there may be a small fee for using one.
- Once your bank account is open and active, you can use your debit card to make purchases.
- The money you’re using to make purchases using your debit card will be taken directly from your bank account.
- You can also use debit cards at an ATM to withdraw cash from your account.
- You’ll likely see the withdrawal or purchase immediately reflected on your account.
- If you don’t have enough funds available in your account, the bank may charge you an overdraft fee for spending money you don’t have.
How To Get a Checking Account and Debit Card
Many banks and credit unions will allow you to open an account and use a debit card with them. And while they probably won’t check your credit history, they may look specifically at your banking history. It makes sense, as they’ll want to know that you’re a responsible and financially stable person before they allow you to bank with them.
If you need a new account, you should start by researching banks and credit unions. Find one that fits your needs and then go into a physical branch or apply for a new account online. While opening a new account with a bank or credit union may not be as involved as applying for a credit card, there will still be forms to fill out and questions to answer.
Once you find the right bank or credit union and they approve you for an account, they will be able to provide you with a debit card. You’ll then have to activate your card, which is as simple as a quick phone call using the number listed on the card. Your card will have specific instructions for activating it and setting up your PIN.
Which Debit Card Is Right for You?
Just like with credit cards, debit cards all offer different terms and conditions. Some banks and credit unions might even have introductory offers, just like with credit cards. They may even provide a small amount of cash to start your account.
Make sure to do plenty of research, not just on specific debit cards and credit cards, but also on the bank, credit union, and credit card issuer.
Debit cards may not have as many nuances to review as credit cards do, but it’s still worthwhile to research them. A credit card will have a lot of perks to review, while debit cards probably won’t. Debit cards are much more straightforward.
Since debit cards are only used to access the money you already have, there isn’t much research regarding conditions and perks. The thing to focus on when getting a new debit card would be the bank or financial institution.
The Risks of Debit Cards
As you can probably tell at this point, debit cards are not nearly as risky as credit cards. This is because you aren’t able to spend cash that you don’t have. While a credit card allows you to get in over your head by spending a lot of money you may or may not have, debit cards only access what’s in your account.
A couple of things to keep an eye on with debit cards would be overdraft fees and fraudulent charges.
Overdraft fees are charges that the bank will place on your account as a penalty for spending more than you have in your account. For example, if you make a purchase that’s more than the cash you have available, many banks will place an additional fee on your account as a penalty. So keep a close eye on how much you have in your account before making a purchase with your debit card.
Fraudulent charges are another vital thing to watch out for. Unfortunately, identity fraud and banking fraud are common occurrences. This is when someone you don’t know uses your debit card to make purchases you did not authorize. The best way to avoid this is to track your charges very closely using online banking.
Credit Card vs. Debit Card: Which Should You Use?
The short answer is both. Both a credit card and debit card can be a part of a healthy financial life. It’s all about using them responsibly and only when you need to. A credit card poses a higher risk to consumers, as it’s much easier to accrue large amounts of debt using one. Misusing a credit card can lead to a lower credit score, poor credit history, and negative marks on your credit report.
A debit card, on the other hand, doesn’t require you to borrow money. All you’re doing is accessing the money that you already have in your account. And while a credit card might make it easy to borrow money, it’s always best to use the funds in your bank account. This can also help you to avoid high amounts of debit and Credit card interest rates. And it makes sense; if you can avoid having to pay interest, why wouldn’t you? No one wants to pay interest if they don’t have to.
When using your check card, pay attention to what you spend to avoid debit card fraud. And while it’s usually much easier to get a debit card, some banks may not approve you if you have a poor banking history. If this is the case, ask them about prepaid debit cards. They may be more likely to give you one of these.
The most important thing to remember is that using either of these tools responsibly will keep you out of financial trouble in the future. So do plenty of research, find the right financial product for your life, and work hard to keep track of your finances throughout the process.
References:
https://www.investopedia.com/ask/answers/110614/what-are-some-examples-common-credit-card-reward-program-benefits.asp
https://www.consumer.gov/articles/1004-using-debit-cards
https://www.cnbc.com/select/credit-scores-opening-bank-accounts/
https://www.nerdwallet.com/blog/average-credit-card-debt-household/
