Credit cards vs. Debit cards

Credit cards vs. Debit cards
Cash Lady

Credit vs debit cards

Credit vs debit cards – they are the same size, and they are both made of plastic.

But that is where the similarities end. If you need to understand how a debit card works, what low interest credit cards are or how credit cards compare to debit cards, read on.

Credit vs Debit cards – What is the Difference?

Credit and debit cards both share 16-digit numbers, expiry dates and PIN codes. However, while a debit card provides access to your bank funds, a credit card provides access to borrowed funds from a credit card company, up to a set credit limit. 

Debit cards –  The advantages

Credit vs debit cards

Free from fees – Typically debit cards do not involve any fees, unless you are using your overdraft, or go over your overdraft. The only exception is where a prepaid debit card is used, which generally involves activation and usage charges, in addition to other fees. In contrast, credit cards can charge annual fees, over-limit fees, late payment fees and interest.

Managed spending – A debit card draws on money that you already have, or on a set overdraft, from an account that may also have household direct debits. This often means that consumers ‘think’ about the purchases they make as though they were paying in cash, whereas with a credit card the temptation is to view the spending as free money, at least until the first bill arrives.

Credit cards –  The advantages

Credit vs debit cards

Rewards – Credit card companies can offer an array of special rewards – such as points, air miles, cash back and discounts. With these cards, consumers could well reap the benefits of the card, while avoiding interest by repaying the bill, in full, each and every month. As the perfect example, take the MBNA American Express Card with Cashback. This type of card pays 1.5% on shopping at almost all petrol stations and supermarkets, in addition to 0.75% when you spend elsewhere.

Ability to rebuild a poor credit score – When used responsibly a credit card can help to repair a blemished credit history. As long as the balance is regularly paid off, on time, this behaviour should reflect positively on a credit report. It is worthwhile noting however that credit rebuilding cards do typically attract a higher than average rate of interest, which can lead to a worsening in the person’s financial circumstances should they get into debt.

Benefitting from purchase protection – As a credit product, credit cards are legally obliged to provide certain levels of protection, as defined by the Consumer Credit Directive. In a nutshell, this means that the card provider is held jointly liable alongside the supplier for any purchases you make.

The option of overcoming existing credit card debt – Credit cards that offer 0% interest on balance transfers can help you to repay your existing credit card debt more quickly. We describe how this form of credit card works in the next section.

How do interest free credit cards work?

Credit vs debit cards

For those who manage their finances well, the best credit cards are low interest credit cards and interest free credit cards UK.

One of the major benefits of a credit card over and above a debit card is the ability to use credit without any interest charges. So-called 0 interest credit cards may refer to one of two types of credit card promotions:

  • An interest free period on purchases – this promotion allows you to purchase goods and services without incurring interest on the resulting credit card balance. This would apply for all new credit card purchases for a set period.
  • Interest free balance transfers – A balance transfer is where one credit card balance is shifted to another credit card. Credit card companies usually incentivise this move by offering 0% interest over a set period. There will be a % fee to pay for this privilege, however. For example, Tesco Credit Card offer 0% interest on transfers for up to 36 months, with a 2.69% fee. On £1500, the fee would then be £40.35.

Credit vs Debit cards – An important note on cash withdrawals

Credit vs debit cards

It is almost always preferable to use your debit card for a cash withdrawal, rather than receiving a ‘cash advance’ from your credit card. This also applies to purchasing Traveller’s Cheques, buying foreign currency, gambling transactions and electronic cash transfers. The credit card fees associated with this form of transaction are charged at a higher rate of interest, and incur a fee on the amount withdrawn (which is typically 3%, with a minimum of £3).