Debit Card vs Credit Card (1/2)

Written by imoney

“Pay now” or “pay later” – the simplest and the most straightforward description between a debit card and a credit card. What are the benefits and which is the best for your current spending habits? Let’s take a look at the inner workings of each card.

Debit card: How it works

Your debit card is a “pay now” card. It is linked to your bank account so everytime you make a debit card transaction, the amount is automatically deducted from your account.

There’s no credit limit; your transaction amount is limited only by the amount of money you hold in your bank account. Think of debit cards as paying by cash but without the hassle of carrying cash around.

Some banks allow some overdraft protection where you can exceed the balance you have in your bank in exchange for an interest charge. This means, you can spend $110 even if you only have $100. The bank will then charge you fees for overdraft charges.

Credit card: how it works

Credit card is a “pay-later” card. The card issuer provides a credit limit. This credit limit is the maximum amount you can “borrow” to make purchases.

You are usually given an interest-free period of between 15-30 days to settle the bill before a fixed interest fee is applied to your credit card bill.

Since credit cards involve borrowing money, they can be very expensive to maintain if interest charges and fees are left unchecked. Proper management and diligent payment are key!

Conversely, debit cards can be dangerous as they provide instant access to your bank account balances. Fraud prevention is arguably even more important where debit cards are concerned. If your debit card falls into the wrong hands, your entire bank account balance could be at risk.

That concludes our quick guide on debit cards and credit cards. If you’re interested to learn more, you can continue reading our second part of debit card vs credit card.

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Check out some tips on keeping your credit card well managed.