How Is a Debit Card different from a Credit Card?

There really is no mystery to a Debit Card. It quite simply is a card that is attached to your savings bank account (or cheque account) and you can use it to purchase goods or get cash from an ATM.

What does need to be understood is the fact that it can only be used when you have cash in your account. It is not a card that you can use with the idea of paying for it later, as you can with a credit card.

Where it can become confusing about a Debit Card is that they do have different names given to them by different banks. They are known by many names and commonly in Australia they are: Debit Credit Card, Keycard, Handycard, Flexicard, Access Card or Cashcard.

In most cases Debit Card processing is handled the same way as a credit card is. That means that when you are purchasing through an EFTPOS machine you can swipe your card and use a PIN (Personal Identification Number) to process the transaction. Most cards work this way, although there are some cards where you still have to sign for the purchases. It has now been made law that if you are purchasing through an EFTPOS machine that is not provided by your bank of choice then you may be charged a fee.

Debit Cards are an ideal way of handling your bills if you have difficulty in making your expenses fall within your income range. This is a difficult situation for anyone and unfortunately when this does occur the credit card gets a real hammering and then more problems arise because interest has to be paid on unpaid balances. It would be ideal to get rid of the credit card and just manage with a Debit Card.

Credit cards seem to be such a good idea and they are for those who can afford to pay off the balance each month, but for those who have very little disposable cash at the end of the month, there is always the temptation to overspend on a credit card. It is a very common human trait to buy what we want rather than what we need and a credit card panders to that very weak trait that most of us have.

We love spoiling ourselves, but unfortunately it has to be paid for!

Using a credit card is like having a bank overdraft on your cheque account. You are spending money that you don't have at the current time but it does have to be paid back. If you don't pay the full balance when the statement comes out you will be paying interest and there are also other charges you may incur if you are struggling with your budget and that is the over limit fee if you spend over your limit or the interest takes your account over the limit, and the overdue fee if you do not pay your credit card monthly payment on time.

Over a period of time, unless you are very good at controlling your credit card repayments, you may find yourself in a continuing 'revolving balance' situation by never clearing your credit card debt and having to pay some interest each month.

If you don't have the need for credit, and want to spend your own money, a Debit Card is:

  • a lot cheaper
  • no risk of overspending
  • you can access cash at an ATM
  • has rewards and other features
  • you can only spend what you have
  • you can use it in nearly all the same situations you would a credit card
  • you can use most of the cards for online shopping
  • you can use them overseas (some are better than others)
  • you receive monthly statements with payment details
  • no interest is charged on the account
  • no risk of over limit or overdue fees which are so costly
  • easy to get from a bank, especially for anyone without a credit history

There is one great advantage of using a Debit Card if you are a regular shopper online. You can have a card that is used solely for that purpose and only put money in it when you want to make a purchase. You see, even if your card was fraudulently accessed on the internet, they could only take the amount that is in the account. So with this in mind, if you keep a nil balance until you are ready to purchase you have no fear of money being taken from your account.

Some banks have 'internet cards' for this purpose where this no physical card as such.

Another advantage of a Debit Card is that you can more easily control your budget, but also if you have dependents that need to have a spending card you can manage the amount that is put into the card and you can also see when and how it is being spent by reading the statement.

When choosing a Debit Card check out all the features before you commit yourself and enjoy the financial benefits of not having a credit card.

Image: Shutterstock

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