Now that you understand the differences between a debit card and credit card, you may be wondering when it makes sense for you to use each. There is typically a limit to how much you can withdraw at one time, and you may be charged a fee by your lender. Like debit cards, you can sometimes use your credit card to withdraw cash if it is needed. Although you can max out your credit card if you want, doing so can negatively affect your credit score by driving up your credit utilization rate (how much of your available credit is being used), so it is generally not advisable. Your credit limit is the maximum amount of money that you can charge to your credit card at any given time. Credit cards also have a limit, called your credit limit, which is determined by a number of factors including your credit score. With a debit card, you have a natural limit to how much money you can spend: the amount of money that is in your checking account. And because credit cards are a form of unsecured debt (they are not backed by an asset like a house or a car), the interest charged on a credit card can be particularly high. If you are unable to pay the balance back in full before your payment period ends (typically a month) then that balance will begin to accrue interest, just like any other loan. When you make a purchase with a credit card, though, you do have to pay it back. The chief difference between a debit card and a credit card is this: When you make a purchase with a debit card, you do not need to pay the money back because you are accessing your own money. While debit cards are linked to a checking account (and withdraw money from that linked account in order to complete transactions), credit cards are linked to a line of credit-essentially making them a form of loan that you can access as needed. Both are made out of either plastic or metal both contain a magnetic strip and security chip both are used to make purchases, either in person or electronically. What is a credit card?Ī credit card is similar to a debit card in a number of ways. And those fees can be hefty: The average is currently $4.72, according to Bankrate. You can also use your debit card to withdraw money as cash from an ATM or from some retailers, though you may be charged a fee if you use an out-of-network ATM. If you have not opted into an overdraft protection service through your bank, then your card will simply be declined. According to Bankrate, the average overdraft fee in 2019 was $33.36 per overdraft. If you have opted into overdraft protection, the transaction will be approved and your bank will transfer the required amount of money from the secondary funding source over to your checking account. Overdraft protection means that you have linked a secondary funding source (often a savings account or credit card) to your checking account. This transfer will often happen instantly, though in some circumstances it could take up to 24 hours or more for your checking account to reflect the new balance.Īnd if you don’t have enough money in your checking account? That depends on whether or not you’ve opted into overdraft protection through your bank. So long as you have enough money in your checking account linked to the card, those funds will be deducted from your account and transferred to the retailer. When you make a purchase using a debit card, it’s a lot like paying with cash: You can only spend what you have. Most debit cards are made out of plastic (though some premium cards can be made out of metal) and contain both a magnetic strip and security chip that are used to make transactions. Typically, you will be required to enter a 4-digit PIN to confirm that the card does, in fact, belong to you. You can make a purchase with a debit card either by swiping it physically at a store or by entering your card number online or by phone. You probably already have an idea about what a debit card is, but just in case you don’t: A debit card is a financial product offered by banks and other depository entities that is linked to a checking account. There are some pretty significant differences between credit cards and debit cards, and understanding those differences could mean the difference between having a healthy relationship with money and struggling.īelow, we take a look at how debit cards and credit cards work, explore the key differences between them, and offer some advice to help you understand when you should use (or avoid using) each. It’s also one of the most important questions for you to get right. If you’re new to the world of personal finance, one of the most common questions that money newbies ask is: What’s the difference between a credit card and debit card?
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