Your money is important, and so is where you keep it.
Read here to find the difference between debit and credit and explore other banking basics.
What is the difference between a credit and debit card?
Although, credit and debit cards look alike and are swiped the same, they work differently. Either option can be selected to make a purchase, but the difference lies in how the payment is processed.
Debit cards are liked to your bank account. That means that each time you make a purchase the amount is automatically deducted from your account. Credit cards give you access to a line of credit that allows you to borrow money for purchases and repay it later. Then, at the end of each billing cycle, you will get billed for your purchases plus and interest or fees. There are benefits to each card type, which is better for you may depend on your situation.
A debit card is a payment method that can be used as an alternative to cash. There are two types of cards that are referred to as debit cards– bank debit cards and prepaid cards. Prepaid cards are not quite the same as debit cards so they aren’t always accepted or treated the same way.
It is common practice that banks and credit unions issue a debit card when you open a checking account. The card is linked to your account and when you make a purchase, the funds are automatically deducted.
While prepaid cards are sometimes referred to and processed the same way, they work differently. This is because prepaid cards are not linked to a bank account. Instead, money is loaded onto a card and it can be used in stores or online. Keep in mind, that because it isn’t an actual debit card, it doesn’t have all of the same protections.
Debit cards are great for:
- keeping spending in check
- setting up alerts to monitor debit card activity
- you don’t pay interest on your purchases
- you can use your debit card to withdraw cash or get cash back when making a purchase
However, there are some things you should be cautious with:
- you may get charged fees– ATM fees, overdraft, or for using your PIN during a transaction, or paying to activate/ reload a prepaid card
- it will not help build your credit history
- you could be liable for fraudulent charges
A credit card offers a line of credit that lets you borrow money to make purchases. Many credit cards will allow cash advances for balance transfers, When using a credit card, you agree to repay the credit card company the amount you borrow, plus any interest charges that may accrue.
Credit cards are a good option because:
- Fair Credit Billing Act
- help you build credit history
- rewards or cash back opportunities
- can be used to pay even when you don’t have cash on hand
However, credit cards have some cons too:
- it is really easy to rack up debt, if you’re not careful
- you will be charged interest if you don’t pay your balance in full at the end of each billing cycle
- you may get charged fees for late payment, return payment, balance transfer, or foreign transaction fees.
Which is better?
Ultimately, deciding which card type is best for you depends on your spending habits and how you plan to use it. But, there are some details you may want to think about to help make your decision.
Gas stations tend to be one of the riskiest places to pay with a card because so many of them have not installed EMV chip readers. This makes it easy for card skimmers to swipe your information when you pay at the pump. Using your debit card when fueling up because it is tied directly to your bank account. Although using credit is safer, many people still opt to pay debit.
Credit cards are the better option for building credit and improving your credit score. The best way to establish credit is by making on-time monthly payments and keeping your balance low. If you’re looking to earn rewards, credit cards are the better option as most debit cards do not offer them.
What is a checking account?
A checking account is the account type required to make debit transactions. These accounts typically offer both debit card and check-writing capabilities. Withdrawals can take the form of cash withdrawals made at a branch or ATMs, or as debit card purchases, checks, money orders, ACH transfers, and wire transfers. Deposits can be made by depositing cash, checks, or money orders at a branch or an ATM, as well as via mobile check deposit, automated clearing house (ACH) transfer, or wire transfer.
A checking account is the best way to house and access your funds for daily transactions. This account type is helpful for:
- paying bills electronically or via check
- make purchases or ATM withdrawals with linked debit card
- transferring money to an account at a different bank electronically
What is a savings account?
A savings account acts as a home for your money that you don’t need daily access to. Opening a savings account is a great idea if you are looking to grow your emergency fund, save for a vacation, a down payment, or home improvements.
Savings accounts tend to have higher interest rates which means your money will earn money just by sitting in the bank.
It is important to consider that some institutions have a minimum balance requirement for opening a savings account.
Banks vs. credit union
When it comes to keeping your money safe– most people opt for a bank or a credit union, but what is the difference? Part of the difference between the two financial institutions is the profit status. Banks are for-profit, meaning they are either privately owned or publicly traded. Whereas, credit unions are nonprofit institutions.
A credit union is owned by its members because the institution is set up as a cooperative. Nonprofit credit unions are also generally exempt from federal taxes, and some credit unions even receive subsidies from the organizations that they are affiliated with. This means that credit unions don’t have to worry about profiting off shareholders. Generally, credit union members get lower rates on loans, pay fewer (and lower) fees and earn higher APYs on savings products than bank customers do.
Banks are in the business of making money. Because they are interested in making profit, sometimes they don’t meet the specific needs of the account holder. It isn’t uncommon that banks charge more fees at higher rates than credit unions.
Just about anybody can open an account with a bank. Generally, they will also have more branches and ATMs available than credit unions. Banks typically have more advanced financial technology
Credit unions are also known for having great customer service and offer good resources for financial education as part of their services. Because credit unions are not-for-profit, there is typically no minimum balance requirement. Also, you will likely get lower interest rates on loans from a credit union than a bank.