Credit and debit cards are two similar forms of payment that offer you convenience and protection, but they are actually very different. While these two cards can almost look the same, they function differently. Before using them, it's important to understand how they really work.
What is debit
Debit refers to the process of removing funds directly from your bank account. When you use a debit card, you're giving the merchant permission to remove a certain amount of money out of your bank funds and place it into the merchant's account. The card that you used is a tool that provides you with access to your own money. The amount of money you can spend is the amount that you have in your bank.
What is credit
A credit card is not a link to your bank account. Instead, it is a way for you to borrow money from the company that issued you the card. Credit cards have a limit to the amount of money you can borrow. The users of credit cards are charged interest on the money they borrow that typically starts accruing interest one month after purchase. This helps ensure that the credit card company will be paid back and provides a way for those credit card companies to make money.
When should you use credit?
Typically credit cards are used for short-term financing, according to Citi Bank. Credit cards can also earn users rewards like flying miles or discounts at certain retailers. Many credit cards that are specific to a retailer provide warranties to customers as well. For this reason it can be smart to use a credit card when shopping at specific retailers.
Also, credit cards offer greater protection to users from theft. If the card is stolen, it's much safer because it isn't tied directly to your bank account. Lifehacker suggested using credit cards for online purchases or while traveling so if your card is stolen, you have other funds to use in the meantime.
When should you use debit?
Because debit cards are a direct link to your bank account the money is removed quickly. If you need to make a quick payment, do so with a debit card instead of a credit card.
Lifehacker said that using a debit card for tight budgets can be smart because you can easily see exactly how much you're spending. While credit cards can give you a little leeway between the time you make the purchase and the time you really have to pay for it, it's generally a poor decision to handle finances that way. When you're on a budget it's much better to not borrow money through credit cards if you don't have to.
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