When you’re debating between getting a new debit card or switching to a credit card, it’s important to look at the ways they’re used, how they can benefit you, and which would be more helpful in simplifying your financial life.
Credit and debit cards look essentially the same. They both have 16-digit numbers, expiration dates, and security codes. The differences are perhaps most notable in how they function, where the payments come from, and how they’re involved in your financial well-being. Let’s take a closer look.
What’s the Difference?
Debit cards are set up so that they draw funds from a related checking account. That means, when you order a new debit card, it automatically links back to the account you want it tied to, and each time you use it, the charge subtracts the cost of the purchase directly from your checking account.
Debit cards are usually tied to checking accounts. A savings account is normally opened in order to save money, and although some financial institutions will allocate an ATM card on a savings account, they support your savings goals by not providing the means to electronically draw on the account.
Benefits of Credit Cards
Debit cards certainly have their perks, but they may not be able to offer a comparable level of protection on your account. Unlike being connected to your checking account, credit cards are tied to a line of credit that’s usually based on factors such as your credit score, debt-to-income ratio, and solvency. A line of credit often has a maximum amount “made available” for use via the credit union or financial institution. That amount is based on the account holder’s projected ability to repay the costs of their purchases on a monthly schedule.
Because of the service of extending credit, a financial institution can usually charge a fee or have a set series of requirements in order to be a cardholder. While this may sound more complicated, one of the benefits is that, based on expectation and trust that the money can be paid back, cardholders can spend more money than they have available in cash at the moment. This might be helpful, for example, if there’s a large, unexpected expense, such as the sudden need for a new washing machine or an emergency medical procedure.
Credit cards also offer better consumer protection should the card ever be stolen or hacked. There are often better warranties and fraud protection in place.
Types of Credit Cards
There are four primary types of credit card products that financial institutions offer. These categories sum up the sort of electronic lines of credit available to the everyday consumer.
Standard Credit Card
A standard credit card is just that: a standard line of credit. It’s available to you on the basis of approval and can be used for in-person or online purchases. There’s nothing frilly or fancy about it, but it does make life a lot easier, particularly for digital or over-the-phone purchases. There can be an annual fee with credit cards, and you should both check what the current prime rate is and see what your credit union can do for you with regard to the interest rates.
If you do a lot of shopping for your business, travel often, or like to dine out, there are specialty rewards cards that can build awards, travel points, or even cash back. The interest rates on these can vary, as can the annual fees, though, if you’re searching for a new credit card at the right time of year, sometimes financial institutions are able to waive the first year’s fee.
Secured Credit Card
The secured credit card is different from the two above because it actually requires a deposit (usually due upon opening) that will act as collateral for the purchases charged to the card. The issuer will hold this collateral during the use of a secured credit card.
A corporate card is a type of credit card that is especially handy for businesses that need their employees to be able to operate and make purchases without running it through the company each time. These cards will normally be paid in full each month and either don’t allow balances to be carried over or simply will not carry a balance over to subsequent months because the balance is paid completely each month.
Just like any line-of-credit financial product, a credit card application will be run in conjunction with a current credit report.
Opportunities and Benefits of Debit Card Use
A primary benefit of using a debit card over a credit card is the lower cost to keep it in your wallet. Debit cards tend to have low or no fees. Cardholders also don’t have to worry about paying a bill at the end of the month, so there’s no risk of late-payment fees. Plus, because the spending capacity is limited by an account balance, debit card users can’t spend more money than they have. This completely avoids the potential for interest charges for unpaid balances. You could be charged NSF fees, though, if you use your debit card on a purchase above the amount you have in your account.
Debit cards are generally easier to obtain than credit cards. A standard debit card draws on the attached checking account. This means there are usually few, if any, extra hoops to jump through in order to get a new debit card. For example, generally speaking, when requesting a new debit card, a credit check won’t be required unless the issuing financial institution stipulates it as a prerequisite.
Prepaid debit cards are an option for customers without checking accounts or credit cards. They allow consumers to access services that call for credit or debit card use, such as paying for gasoline at the pump. All they have to do is “fill up” the card, and then they can use it to make purchases. And once again, cardholders can’t spend more money than they have.
To find out more about getting a new debit card or applying for a new credit card, ask the local experts at Rivermark Community Credit Union.
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