The credit card is one of the most popular payment instruments in the world. The term is sometimes used interchangeably to refer to any other type of bank card that works at merchant POS terminals or to take out cash at ATMs. This confusion is normal, given that credit and debit cards have several features in common and look pretty much the same.
Both card types, although accepted in almost all physical and online stores, have certain characteristics that make them suitable for particular customer profiles. For this reason, we want to shed some light on the differences, so you can make more informed decisions.
What is a credit card?
The credit card is a plastic payment instrument that allows you to spend money without having cash deposited in the card’s account. As a matter of fact, most of the times credit cards are not linked to a bank account but rather draw from a credit line. The first advantage of credit cards is that they let you spend money you don’t have right now. Credit cards can be used for all sorts of payments – online and offline.
Unlike debit cards, which require the immediate deduction of the amount from your bank account, the credit card repayment for the borrowed sum will be postponed to a later date. And of course, you may have to pay interest if your repayment is not full, on time or missing at all. Depending on your contract with the credit institution, the minimum repayment can be withdrawn from your bank account at set intervals, once a month, or you can manually pay more than 1 instalment every month. It depends on your ability to repay debt.
The credit card details include the name of the cardholder, card number and expiry date. The owner may be required to sign it in the space provided on the back. In some countries, you only need to sign the receipt, instead of entering PIN, but this practice is slowly becoming obsolete. Mastercard, for example, recently changed the rules for Europe and signature is no longer mandatory.
A credit card may or may not have a PIN. Having one means that the card can be used as a withdrawal instrument at any ATM.
Credit cards have daily, weekly and monthly transaction limits. Hitting these will prevent you from making purchases until the upcoming date resets either of these counters, or if you request an increase.
Another major advantage of credit cards is the ability to book hotels and rental cars, hassle-free. These businesses need additional reassurance to let you on their premises or let you drive away with their car. What assurance, why not pay a deposit, in advance?
- They know you are who you say you are because the credit card issuer has verified your identity.
- Being “creditworthy” and having a credit card increases the chance that you will be able to repay if any damages occur.
- The hotel or rental company will usually block a few hundred Euro from your card, which will make you return the vehicle to get your money unblocked.
- It’s much easier dealing with credit card (electronic) payments than handling cash and accounting for cash.
- Paying a deposit with your debit card may also be possible, but the company might have more difficulties getting the money from your card than with credit cards.
- It is widely acknowledged that credit cards may come with additional car rental insurance. This helps the renting company reduce their risk in case of an accident because your insurance will cover the damages.
What are the disadvantages of credit cards?
After discovering the details and pros, it’s time to list the cons and the dangers of having and using a credit card.
- Difficulty in obtaining: If, in the past, you have been a “bad payer”, requesting a credit card will be particularly complicated. Every lender has strict rules for making sure a borrower can return the money owed. If you have bad credit, you will be asked for a lot of documents such as proof of income, level of debt or even collateral.
- Interest rates and debt: Credit cards let you spend money you borrowed. As mentioned above, your debt will incur interest if you fail to repay the money in full. Your initial standpoint – buying things you can’t immediately afford – is risky. For this reason, you have to be very careful with your budgeting. You don’t want to find yourself in a situation of not having enough funds to return to the bank. Failing to come up with your minimum required payments can quickly spin your debt out of control – owing more and more money.
- Usage fees: Due to the risks for the lender, credit cards tend to have relatively high costs for withdrawing cash at ATMs. Some will even slap you a fee for making payments on POS terminals. Be careful because going to a foreign country may surprise you negatively with higher than expected ATM and currency conversion fees.
- Annual costs: Another major disadvantage of using a credit card could be the high annual management and maintenance costs.
Let’s explore debit cards
The debit card is a plastic payment card but unlike credit cards, you need to have money in the connected bank account at the time a transaction is carried out. When paying, the card network verifies that you have enough funds, before a transaction is confirmed. Be aware that some bank accounts with linked debit cards can offer an overdraft facility, which in essence turns a debit card into a credit.
Debit cards don’t just look like credit cards. They can carry identical branding and card network logos (Visa, Mastercard, Discover, American Express, etc.), which enables the cardholder to use it anywhere credit cards are accepted. The way to recognize its type, according to the card network rules, is a text indicating whether it is “debit”, “credit” or “prepaid”. See below:
ATM cards are sometimes confused with debit cards but the latter does not only work for cash withdrawals. You can buy pretty much anything, should your transactional limit allow it. Daily, weekly and monthly limits are normally established by the bank issuing the card. A major disadvantage of debit cards is that you might be unable to book a rent-a-car or a hotel with it. Also, keep in mind that the majority of debit cards give you no additional insurance.
Debit cards can be used for payments at POS terminals, online shopping, ATM cash withdrawals, recurring card payments for various utilities (Water, Electricity, Gas) and subscriptions (Internet, Online subscriptions, etc.). You might want to learn how to pay smart when abroad.
What are the advantages of debit cards?
- Total control of finances: Unlike credit cards, debit cards deduct the funds from the savings you have on your current account, therefore there is no danger of spending more than what you can afford.
- Lower commissions: Most debit cards are free, and the withdrawal or payment costs are particularly convenient.
- Accessibility: To get a debit card you will only need to open a bank account, you don’t need a good credit record. Getting an overdraft, however, may require further checks.
- Cheaper ATM withdrawals: Check out how this is possible.
Both card types, nowadays, come with the “contactless” feature, letting you pay quickly, with a tap. However, you might want to learn a bit more about their safety.
iCard offers you a Free VISA debit card for each of the 7 currencies we support, with no monthly or annual maintenance costs. You can select free postal delivery or express, by courier, throughout Europe. Our transactional limits might be higher than other financial institutions and above all, you can use iCard Visa to pay around the world with no additional cost.
For those of you who need even more spending power (and some additional perks), we have just recently launched the exquisite iCard Visa Infinite.
And if you are aware of the risks associated with online payments, you might want to see how to stay protected with virtual debit cards.