That tiny piece of plastic with your name in your wallet or purse has grown in prominence in our commercial landscape. In 2019, there were more than 108.6 million credit card transactions per day in the U.S. alone. This staggering number shows how much we depend on credit and debit cards to make daily purchases. These cards are similar in name or appearance, but their function and effect on your financial outlook can differ significantly.
Before you tap, insert or swipe your card, it’s essential to know how it works and which will work best for you. Stick with us as we dive into the debit vs. credit cards debate and get answers to other valuable questions, including, can I get a credit card through my bank?
How Do Debit and Credit Cards Work?
While the technology surrounding these payment methods may have evolved over the last century, many debit cards and credit cards work in a similar manner at the point of transaction:
- You use the card to make a purchase.
- A check is run to make sure your account has the requisite funds.
- Your merchant is paid, and you receive goods or services.
However, the origin of the money for each card is different. Let’s look at a few functional differences between debit and credit cards.
Since their inception in the 1920s, credit cards have worked to serve the same purpose over the last century, to help consumers buy now and pay later. With a credit card, your transaction looks like this:
- Money comes from your card issuer’s account and is limited by your available credit limit.
- You don’t pay anything at the time of the transaction.
- In this way, you receive a short-term loan or line of credit each billing cycle. When you make a purchase, the amount from your transaction is deducted from the amount you can borrow for the billing cycle.
- You pay back your card issuer at the end of each billing cycle (usually a month at a time).
Debit cards came around a little later than their counterpart but have worked to achieve the same goal of getting bank customers money from their accounts more conveniently. Here are a few things to note about how debit cards work:
- Money comes directly from your checking account.
- Your spending is limited to how much money is in your checking account or the daily limit as established by your bank.
- Most debit cards can access cash from your financial institution’s ATM or an ATM in their network.
Pros and Cons
When looking for your transaction card of choice, you need to know the benefits and drawbacks of each to see which you should use in various spending situations.
Pros and Cons of Debit Cards
Let’s start with some of the benefits of your debit card:
- Debit cards use your money. The debit card works like cash or a check: you can only spend what you have in your account or up to the daily limit as established by your bank.
- Debit cards have few fees. One pro for most debit cards is they have few fees attached to them, which can vary depending on your bank and type of account. There are typically fees associated with withdrawing cash from an ATM that isn’t in your financial institution’s network.
- Debit cards come standard with checking accounts at most banks. Most debit cards are as easy to obtain as opening a checking account. You can also monitor all of your purchases through your mobile banking app.
- Debit cards are safer than cash. If you prefer to pay for items credit-free, a debit card is safer than cash as you can quickly disable it if it is stolen or your information is taken. If cash is stolen, it is difficult to trace.
Debit cards are a great option for making purchases. However, they aren’t free of flaws. Here are some of the drawbacks of using a debit card:
- Debit cards are limited by the amount of money you have. Whenever you use a debit card, you can only spend what is in your account or the daily allotment set by your bank. If an emergency arises and you don’t have an emergency savings fund, a credit card may help you stay afloat until your next paycheck.
- Debit cards offer few rewards. Most debit cards don’t have any cash-back or other incentive-based programs.
- Debit cards can’t raise your credit score. Having a strong credit score can help when you need to secure a loan for a house, car or other significant purchase. Debit card transactions aren’t tracked by credit bureaus like credit cards are.
- Debit card transactions may not be eligible for stop payment. Whereas stop payments can be issued on written checks, stop payment on debit card transactions are not available.
Pros and Cons of Credit Cards
Credit cards can be used in a lot of the same situations as debit cards but offer a different blend of incentives:
- Credit cards have advanced security features. Many credit cards feature the most security features among any type of payment. Since credit card issuers are lending their money, they offer protections to mitigate the effects of theft and fraudulent activity.
- Credit cards can help raise your credit score. If used responsibly, a credit card can raise your credit score. Paying off your balances each month and not spending over your limit can show credit bureaus that you are a trustworthy candidate for larger loans.
- Credit cards are available in a variety of incentive packages. From cash-back to airline miles to low introductory rates, many major credit card issuers offer rewards to customers and businesses.
While using a credit card can be advantageous, it can also introduce some risks to your financial situation, including the following:
- Credit cards can lower your credit score. Credit cards have duality in that they can help or hinder your credit score. If you default on payments or spend over your credit limit, you may see adverse effects on your credit score.
- Credit cards can have high-interest rates. Credit cards can carry high interest if you don’t pay the full balance each billing period.
- Credit cards can quickly introduce you to a lot of debt. If you spend more than you are able to pay back, interest costs can cause your credit card bill to grow.
When Should You Use a Debit Card or Credit Card? Our 4 Tips
After reviewing each payment type’s benefits, it becomes a little bit easier to see where each card works better than the other. To bolster each side, we’ve put together a short list of a few instances where you may want to use one over the other.
- Credit card: Great for essential purchases. Using your card for essential purchases can help you build your credit score over time. Some of these purchases can also net you rewards. If you are building credit, it’s great to pick one essential purchase you can use it on, like gas or groceries.
- Debit card: Excellent payment method for larger fixed expenses. Paying for larger fixed expenses like rent or insurance is best saved for your checking account, as paying interest on these large expenses can become cumbersome over time.
- Credit card: Traveling and online purchases. Credit cards can offer you more security features, and they aren’t tied directly to your bank account, which makes them ideal for traveling and online purchases.
- Debit card: ATM withdrawal. If you need cash, it’s best to use your debit card at an Automated Teller Machine. Even if there is a fee on the withdrawal, you pay it immediately instead of later with higher interest.
Find a Great Local Bank That Offers Both
If you want to shake off poor service and pathetic perks from your current financial institution, it’s a great idea to bank locally. If you’ve been asking yourself, “can I get a credit card through my bank,” the answer is yes! Community Point Bank offers debit and credit cards with excellent benefits. Visit our contact page to find one of our locations to learn more.