Debit card vs credit card

Watch your debit card and credit card duke it out

Every time you make a purchase with a card, you generally choose between your debit card and credit card.

Even though each option represents a way to access basically the same thing (your money), it pays to be smart about when to use each payment type and to understand the differences between them.

Watch as your debit card and credit card duke it out, along with the prepaid card (and keep watching to see the sad gift card at the end!).

Debit card

The basics

A debit card is linked to your chequing account and can be used for point-of-purchase transactions and online transactions, and can also be used to withdraw money from an ATM.

A debit card is kind of like an instant personal cheque. When you pay for something with debit, that amount is transferred from the funds in your account instantly. Although chequing accounts sometimes have a monthly fee, it’s generally very affordable.

When used poorly

But there are drawbacks: for example, if a debit transaction takes your available balance below $0, your financial institution will usually allow the transaction to go through, but they’ll charge you an overdraft fee. This is called overdraft protection – without it, your transaction would not go through at all (which could be equally frustrating, depending on the situation).

Keeping track of your chequing account balance is the best way to avoid overdrawing your account.

It’s also important to understand that certain activities (like reserving a rental car, making a hotel reservation or fuelling up at a gas station) can trigger a hold on your account. This hold, which can last for several days, lowers the available balance in your account. So, if you don’t account for the hold, you might accidentally overdraw your account.

When used responsibly

A debit card is a basic, convenient and affordable payment option. The monthly fees are usually low to start with; also, depending on your package, monthly fees can be waived if you keep a minimum balance in your account. Online access to your chequing account, or regularly reviewing your electronic or printed statement are also helpful for tracking your expenses and managing your money.

Questions to ask

  • What is the monthly fee for your chequing account?
  • Can the monthly fee be waived with a minimum balance?
  • Is there a monthly transaction limit on your debit card?
  • Can you use other financial institutions’ ATMs? Is there a fee for doing so?
  • Are there online banking tools available to you to help manage your chequing account?
Debit card vs credit card

Credit card

The basics

A credit card gives you access to a line of credit and can be used to make in-store and online purchases. It can also be used to withdraw cash from an ATM as a cash advance, but this option is usually extremely costly.

A credit card is kind of like a convenient personal loan. Every time you use it, you’re borrowing money – the card issuer or financial institution covers your purchase, and then you’re responsible for paying them back at a later date. If you’re not able to pay off your balance in full, you pay interest on your outstanding balance. Many credit cards also charge an annual fee.

When used poorly

A credit card can get you into a lot of trouble. Carrying a balance, spending more than you can afford, making late payments (or worse, missing payments entirely), and taking out cash advances are all damaging behaviours. These behaviours can ruin your credit score, making it difficult to secure future loans, mortgages and even jobs. When used irresponsibly, credit cards are an easy way to accumulate debt.

When used responsibly

If you pay off your balance in full and on time each month, credit cards have a lot of advantages. Credit cards are the only form of payment that builds your credit, which is especially important if you are planning to take out a mortgage or car loan in the future.

Most credit cards offer some type of rewards or cash-back program, which can be a great way to offset the cost of a credit card’s annual fee. Beyond the rewards programs, some credit cards also offer additional protection for purchases made on the card (examples include an extended warranty when buying electronics or complimentary travel insurance when purchasing flights).

Even if you’ve had the same credit card for a while, brush up on its features and see if there’s a benefit you aren’t currently taking advantage of. Of course, none of these perks have any value if you’re caught in the credit debt trap.

Questions to ask

  • What is the annual fee for your credit card?
  • What is the interest rate?
  • Is there a rewards or cash-back program associated with your credit card?
  • Does your credit card offer extended warranties on certain purchases?
  • How much are you charged for cash advances (ATM withdrawals using a credit card)?

No matter what combination of payment types you use, it’s worth your time to understand the ins and outs of each. Take some time to learn about the unique features of each of your banking products in order to minimize any possible drawbacks while maximizing the potential benefits.

Check out Vancity’s chequing account (debit card) and credit card options. Not a member? Join us.

Related posts

Do you have an article idea?

Tell us. Your suggestion might be turned into a story.