In this economy it is more important than ever to keep a track of your personal finances. Chances are if you have a bank account, then your financial institution has issued you a debit card. It looks like a credit card, it seems to work like a credit card, it even has the insignia of a major credit company like Visa or American Express, but is it a credit card? What are the major differences between a debit card and a credit card?
Below we will explore some of the ways these two financial tools differ.
The most important difference between a credit card and debit card is from where they draw the money. A debit card is typically connected to one of your personal accounts, such as a checking account or a money market account. This means every time you make a purchase from a debit card, the merchant notifies your bank, who in turn places a hold on your account in roughly the amount purchased (sometimes the amount of money held can be higher than the actual amount, especially if the product or service purchased often includes a gratuity- never fear though, once the transaction is cleared it should reflect the exact amount you agreed to pay). If you have enough money in your account to cover your purchase, the transaction will go through.
Ultimately, with a debit card you use money you already have to make purchases. They key to success when using a debit card is keeping a balanced checkbook. This means you keep track of all the money you put in your account, as well as every time you take money out of your account.
This is especially important because in light of the “holds” we discussed earlier, sometimes the account balance your bank shows you might not accurately reflect how much money you have once all of your holds go through. If you spend more money then you have, many banks will charge a hefty fee (to the tune of thirty-five to forty dollars per transaction while you’re in the red).
A credit card works differently. When you sign up for a credit card, you are making an agreement with a credit lender. They agree to lend you money up to a certain amount, which you agree to pay back, usually with interest. Credit balances can range anywhere from two hundred fifty dollars to hundreds of thousands of dollars.
When you make a purchase with a credit card, you are not spending your own money. Instead, you are asking a credit company to purchase something for you, and in turn you agree to pay them back with interest. This is why it’s very important that you don’t use your credit card for frivolous purchases. Unless you can afford to pay off your credit balance at the end of every month (which usually lets you avoid paying interest), you will end up paying far more in the long run for even the smallest of purchases.
Every time you are thinking of making a purchase with your credit card, ask yourself if you would be comfortable paying twice the listed price for the item or service. This is a distinct possibility if your interest rate is high enough. If it is something you really need, then it will seem worth it to take the risk.
On the plus side, a credit card can literally become a lifesaver in the event that you need to make a large purchase but lack the funds in your bank account. Say for example, that you’re planning to attend a family reunion. Everything is ready to go, but a week before your trip, your car’s transmission dies on you. If you don’t have a credit card (or an extra three thousand dollars) you might have to cancel your vacation. A credit card gives you peace of mind because you know you have financial options in the wake of an emergency.
Credit cards and debit cards differ in the way they work, but in many ways they are the same. Both provide you with a fast and easy way to pay for your purchases on the go. Both allow you the freedom to shop online. And both allow you to spend money you might not have. The most important thing to do with both cards is keep track of how much money you have to spend and how much money you’re prepared to owe someone else. This will keep your bank account and your credit score very happy.