It's important to consider the advantages and disadvantages of debit cards compared to credit cards, as they differ in several key areas. These are:
Source of funds
When you use your debit card, you’re simply accessing the money you’ve saved up in your everyday account. If you try to spend more than you have, the transaction will be declined due to lack of funds.
This differs from a credit card, where your spending is only limited by the credit limit on your card. You’re effectively spending money that you don’t own. However, you’ll eventually have to pay it back and if you don’t do so within 30 or 45 days, you’ll end up paying a high rate of interest on that money.
Fees
Debit cards tend to be far cheaper to use than credit cards, as there are no monthly fees involved. Most often, there are no account-keeping fees on transaction accounts and the linked debit card is also issued for free. In addition, many cards reward spending by offering cashback offers or other rewards, so you can gain rewards points just by spending your own money.
In contrast, credit cards are a different story; interest rates can be incredibly high, sometimes stretching above 20% p.a. Annual card fees and cash advance fees can also stack up. In addition, some shops, restaurants and cafes add a surcharge onto their prices if a credit card is used, so the price you pay for everyday goods and services can be higher in certain cases.
Ease of application
Debit cards are far easier to apply for and receive as they don’t involve issuing any credit facility. They’re often issued automatically when you open a transaction account and don’t involve submitting financial information to the bank in order to receive a debit card.
The process is more complicated when applying for a credit card, as your previous borrowing and financial history, income and employment status are all taken into account during the application process. At the end of this process, you may not even be approved for your chosen credit card if your credit history doesn’t stack up.
Debt risk
There is zero risk of debt accruing on a debit card, because if you try to spend more than you have in your linked bank account, the transaction will be declined. In contrast, credit cards are essentially small, high interest loans granted whenever you make a purchase. You have to repay your credit card ‘loan’ within a certain period of time (usually around a month), but if you’re unable to pay it all off in that period, you’ll incur significant interest charges. Many people find themselves unable to service their credit card minimum payments, which can result in a debt spiral which can have long-term consequences.
Effect on credit history
Debit cards don’t affect your credit history, as they don’t involve a financial institution offering a credit product. However, using a debit card can’t help you establish a credit history, which you may need the first time you want to apply for a car or home loan.
In contrast, credit cards do form a part of your credit history. Those people who pay their credit cards off promptly and regularly can have their credit score boosted by using their credit card wisely, which in turn can help with obtaining finance in other areas. However, failing to keep up with payments will negatively impact your credit history.
