Credit cards and debit cards are essentially identical in appearance, with 16-digit card numbers, expiration dates, magnetic strips, and EMV chips. With one major distinction, both can make it simple and convenient to make purchases in stores or online.
Debit cards allow you to spend money by drawing on funds in your bank account. Credit cards enable you to borrow money from the card issuer up to a specific limit to make purchases or withdraw cash.
You most likely have at least one credit card and one debit card in your wallet. The simplicity and security they provide are hard to surpass, but there are significant distinctions that could significantly impact your wallet. Here’s how to figure out which one to utilize based on your spending requirements.
What Exactly Is a Credit Card?
A credit card is a plastic card issued by a financial institution, usually a bank, that allows the cardholder to borrow money from that institution. Cardholders agree to repay the money with interest according to the institution’s rules. Credit cards are available in the following categories:1
- Standard cards provide their users with a line of credit for purchases, debt transfers, and cash advances, and they frequently have no annual fee.
- Premium credit cards provide benefits such as concierge services, airport lounge access, special event entry, and more, but they typically have higher annual fees.
- Customers who use rewards cards can earn cash back, travel points, or other perks based on their spending.
- Balance transfer cards provide low introductory interest rates and do not charge fees for balance transfers from another credit card.
- Secured credit cards need an initial cash deposit retained as collateral by the issuer.
- Charge cards do not have a predetermined spending limit, but they frequently do not allow unpaid amounts to carry over from month to month.
By using rewards cards, credit card users can earn cash, discounts, travel points, and various other benefits not available to debit cardholders. Rewards can be applied at either a flat or tiered rate. For example, you may have one card that offers unlimited two miles per dollar spent and another that offers three miles per dollar spent on travel, two miles per dollar spent on dining, and one mile per dollar spent on everything else. You might then utilize your accumulated miles to book future travel plans.
Advantages of Using Credit Cards
Credit cards have several advantages over debit cards, but they also have disadvantages. Here’s a closer look at the benefits and drawbacks of using credit cards to make purchases.
Create a credit history
Credit card use appears on your credit report. This covers both positive and negative items, such as on-time payments and low credit utilization percentages, as well as late payments or delinquencies. The information in your credit report is then used to determine your credit scores. Responsible spenders can improve their ratings by maintaining a history of expenditures and timely payments and keeping their card balances low in comparison to their card limitations.
Warranty and purchasing safeguards
Some credit cards may also give supplementary warranties or insurance on purchased items in addition to those provided by the shop or brand. If a credit card-purchased item becomes damaged after the manufacturer’s warranty has ended, for example, it is worth checking with the credit card provider to see if coverage is available. Alternatively, you may have purchase and price protection built in to assist you in replacing stolen or lost things or refunding price discrepancies when the item you purchased is sold for less elsewhere.