Debit vs. Credit: What Is The Difference?
Jul 17, 2000
Many people are not familiar with the differences between a credit card and a debit card. They may look the same, but they work in completely different ways.
A credit card does not withdraw funds from an account. With a credit card, you must apply and get approved to receive a card from the issuing bank. You are given a credit limit, which you cannot exceed. (there are penalty fees assessed for exceeding your limit) When you make a credit card purchase, the merchant gets approval from a credit card processor, who checks with the card issuer to make sure you have available credit. At the end of the statement cycle, you are issued a bill for the purchases made in the cycle. You must then pay the card issuer for those purchases. Interest is usually charged on balances not paid in full by the payment due date, however, there are several companies that begin charging interest from the date of purchase. Late payments usually result in a steep penalty fee. Visa, Mastercard, and Discover are all examples of credit cards.
A debit card withdraws funds from your checking account. It's basically an ATM card, but has a Visa or Mastercard logo on it. A debit card can be used at any place that accepts cards with that logo. When you present your debit card at a store or restaurant, they process it the same way they do a credit card. However, the funds are immediately withdrawn from your checking account. You do not receive an end of the month statement requiring payment, and there is no interest charged on debit card transactions. Purchases show up on your monthly checking account statement. A debit card is basically a way to make purchases without writing a check. Some merchants also allow you to take cash back on your purchases made with a debit card.
There are several pros and cons when it comes to deciding whether to use debit or credit. The advantage of using a debit card is that you are paying for your purchase immediately, and don't have to wait to get a bill. If you are one of those people who aren't too good at handling money, a debit card is perfect because you can't exceed the balance in your checking account. If there is no money in your checking account, your card will be declined.
A credit card can also be declined, but many people tend to abuse their credit limits without realizing it. Many people make unnecessary purchases, then are unable to pay the bill in full when due. The interest starts to build, and they find themselves unable to pay off the card. A credit card is good for people who are able to pay off the balance in full each month.
Rental car companies normally do not accept debit cards for security on a rental car. This is because they have no way of knowing if the funds will be in your account when you return the car. With a credit card, they can bill you the full amount of the transaction, and you are responsible if you exceed your credit limit. A debit card will be declined if you do not have the funds. Therefore, most rental companies will either not accept debit cards, or they will place a hold on the funds in your account in an amount that far exceeds your transaction amount (my experience has been a hold of $100-200 more than the anticipated total amount). This is to protect themselves.
I find debit cards to be less stressful. I do have a couple credit cards on hand for large purchases, or for emergencies. I also use my credit cards for online purchases, in case something goes wrong, and someone gets ahold of the credit card number online. It's easier for me to report fraud on a credit card, then attempt to get back my cash that I need for rent, utilities and other bills. At least with a credit card, I don't have to worry about being able to access my money.
I personally tend to use my debit card more than my credit cards. It's much easier to keep track of the purchases since they show up on my monthly checking account statement, I also don't have to worry about making a payment to the credit card bank, or worrying about if my payment is late. A debit card, for me, is just an easier way for me to make purchases without carrying cash, or without spending time writing out a check.