Credit vs debit card comparison: the main difference
The financial market offers consumers two options, the credit card and the debit card, with pros and cons for each, which is why it is mandatory that you do a credit vs debit card comparison before you decide on the right option.
Both cards allow you to make purchases, whether online or offline, without using cash. However, there are differences that you need to be aware of before you decide on which card is suited to your personal circumstances.
The main difference between a credit and a debit card is that the latter never offers a credit limit. In other words, if you have a debit card, you will only be using your personal funds and won't have access to any credit. However, if you aren't interested in credit, there are other differences that require a credit vs debit card comparison so you can get a complete picture.
Costs and frozen funds
When conducting a credit vs debit card comparison you will find that debit cards usually are cheaper than credit cards since they don't have as many fees attached to them. Additionally, since you are using your own funds, you won't have to pay interest. However, it is worth noting that debit card transactions usually incur a fee on each transaction at a retailer, also referred to as a point-of-sale fee.
Additionally, when you use a debit card, you will find that a certain amount of funds will be frozen in advance. This happens most often with hotels, restaurants and entertainment venues where a certain amount of funds will be frozen beforehand according to an estimation of what your expenditure might be. While the funds will not be removed from the account, you will still not have access to them until payment is made. This is a security measure to ensure you have sufficient funds available to pay your bill.
Freebies, rewards schemes and product warranty protection
Another difference you will find when doing a credit vs debit card comparison is that debit cards don't offer the wide range of rewards programs or freebies that credit cards do. While these issues may not be important to some, for other people they can be extremely valuable, especially those who travel a lot. This is because one important feature that debit cards lack is the availability of travel insurance.
Travel insurance on credit cards might be limited but it can still be useful since it covers problems with airline travel - missing a connection can be painful and is not as rare as you might think -, hotels, car hire and more.
Additionally, many credit cards offer product warranty protection on large items, such as household appliances, that were purchased with the card. This reduces any risk you might incur on buying high-ticket items and is something that debit cards rarely offer.
Another issue you need to remember during your credit vs debit card comparison is that credit cards are accepted by a larger number of retailers across the globe while debit card transactions are limited. In fact, if you travel a lot, finding a point of sale that will accept your debit card can be extremely frustrating.
The rewards game
Note that in the last two consumer profiles, the operative phrase is if you use it right. Rewards programs are often in place to get otherwise responsible consumers to overspend. If you're just $50 away from a free gift, so you pick up that $60 pair of jeans. In effect, you bought your free gift for an extra $10, even if you get to keep the clothing. If you're overspending to get free miles, concert tickets, or a cash-back reward, then you're not really on the winning end.
Some debit cards have rewards programs, but they're not as attractive as those attached to credit cards. This is because they have a lower profit margin; that is, the bank can't charge the same fees and penalties as they do with borrowers. There's less incentive for them to give away free stuff when it's less likely that they'll get the money back in interest.
Avid travellers can hardly picture themselves without a credit card, even if they can afford to carry wads of cash across continents. Credit cards give them access to first-class lounges, elicit VIP treatment at hotels and restaurants, and sometimes even pays for their trips, thanks to frequent flyer miles. This is one of the biggest come-ons of credit cards, although like in-store rewards, the math usually works in the bank's favour. Indeed, the Wall Street Journal reported last year that credit card issuers are being even stingier with their free miles.
On the road, however, credit cards offer some real advantages. Visa and Mastercard are accepted worldwide, and American Express is gaining ground. Many Australian debit cards will work overseas, but fewer establishments support them. EFTPOS, the payment network in use in Australia and New Zealand, has even more limited coverage.
Play it safe
If safety is on priority of your list, then you'll want to stick to debit cards. There's no risk of being penalised or caught in a spending spree—you simply cannot buy once you've spent all your money (overdraft protection can tide you over temporarily, but not for long). Of course, it's for that same reason you might want to keep a credit card on hand anyway. Most experts suggest having an emergency card with a good credit limit ready at all times, so you don't find yourself at a complete loss.
At the end of the day, debit and credit cards aren't really competing for attention—there are markets for both of them, and as we've mentioned, most Australians carry both anyway. Think of them as a financial tag team: you use one for everyday spending and maybe the occasional perk, and the other will have your back if something goes wrong.
What type of consumer are you?
Mint.com, a financial management tool, classifies consumers into four types. The first two carry credit card balances from month to month, but either pay on time or frequently miss their deadlines. These two are the credit companies' biggest victims—they're the ones at the mercy of interest rate fluctuations and arbitrary increases. If you're one of them, switching to debit for the bulk of your shopping may be a good idea.
The other two types are the light and heavy users who carry no balances and always pay on time. Often, their main reason for using credit cards is the rewards program. In this case, credit cards are more practical—you don't pay interest, and if you use it right, you get the occasional freebie. Learn more about rewards program here.
Pictures: ShutterstockBack to top