Credit Cards Vs. Debit Cards
Credit cards and debit cards often look very similar but they serve different purposes in your finances.
Both have a 16-digit card number and expiration dates and they both have electronic chips.
Both cards can make shopping very convenient. It’s easy to swipe either of these cards if you are in person shopping or give your card number when you are shopping online, but the cards are very different.
When you use a debit card the funds will withdraw from your account at your credit union or bank as they are generally attached to your checking account.
Before you make a purchase using a debit card be sure you have the funds available in your account first. If not, you may be charged fees for being overdrawn on your account. Those fees can be $25, $35 or even more and that would be for each charge over the amount you have in your account.
A credit card, on the other hand, allows you to borrow money from the card issuer up to a certain limit that is set on the card. You have to apply for a credit card similar to how you would for any loan.
The card issuer may be your credit union or bank or somewhere like American Express or Discover. Others may be from a store like a big box retailer, in fact, it feels like just about any national retailer has their own credit card!
You can use a credit card for purchases or cash withdrawals. But keep in mind that cash withdrawals often come at a higher interest rate.
Credit cards are what’s called revolving credit and basically, you can use the card as long as you choose to have it or as long as you have not reached your credit limit for the card.
Therefore, you make payments on just the balance you have on the card. Like any other loan or line of credit, you pay interest on the balance you have. So, credit card purchases cost you more than the purchase amount. The way it doesn’t, is if you pay your full balance on the card every month.
Credit cards can be useful. They are good in emergencies and for shopping online in particular.
Just be careful that you don’t let your balances get out of hand. It can do that quickly. Interest rates can vary depending on your credit card and some can be as high as 30% or more. Maybe shop around for a card with a great interest rate when you are looking to open a new card.
A few bonus tips.
1. Some financial institutions will offer ATM cards that are attached to a savings account only. This card would be good only at ATMs and like a debit card, the funds have to available in your account to use the card.
2. It’s easy to just keep swiping or using a card without thinking about the fact that the money has to come from somewhere – it’s not a magic card! As much as wish it were! So, make sure you have the money in your account to cover purchases on a debit card and realize you are creating a balance that must be paid on if using a credit card.
3. We recommend using a credit card for online purchases versus a debit card.
It tends to be a bit safer. If your card should ever be compromised, you don’t want unauthorized funds coming out of your checking account while you dispute the charges.
If you have any questions about your accounts make sure to reach out to us at First Pioneers!