Can you spot the difference between a credit card and a debit card?
On the outside, a credit and debit card look very similar. Both are little plastic cards, inscribed with a long card number, expiration date, and your name. However, credit cards and debit cards work very differently.
Debit cards are what most people own. They allow bank customers to withdraw funds that were already deposited in their savings account. This means that you can only spend what you have. Contrarily, credit cards permit customers to borrow money from the card issuer – allowing customers to make purchases first and pay the issuer back at the end of the month. In short, you’re spending money you do not have, but promise to repay the spent amount at a later date.
Debit cards and credit cards use may still be in its early stages of adoption in Cambodia. However, with digitalisation and the rising trend of being cashless, these could very well be popular methods of payment in the future. What are the significant differences between a debit card and credit card? How will each card affect your finances and spending habits? Let’s find out more.
Debit cards help you make payment by directly deducting from your bank account to pay for a purchase, only allowing you to spend what you have in your account. For example, if an item costs $80, and there is $100 in your bank account, the total amount left in your account would be $20 after the purchase. If you try to make a payment that’s worth more than the total amount you have in your account, the transaction will automatically be declined. Debit cards can also work like ATM cards, giving you the freedom to take cash out directly of your bank account.
There are a few positive sides while using a debit card.
- Only spending what you have. This is good for controlling your finance.
- No interest rates. Since you are spending your own money, there is no need to charge you an extra fee.
- Debit cards also work similarly to ATM cards, giving you the freedom to cash out directly of your bank account.
- Enjoy similar convenience as a credit card. You can either opt to pay by wave or pin.
- Similar consumer protections will also be covered when the card is issued by major payment processors like Visa or MasterCard.
Credit cards allow you to borrow money from a financial institution to make purchases. Don’t get too excited with shopping though – when you spend on your credit card, you are expected to repay the amount spent at an agreed date. As long as you repay the full amount within the period, you don’t have to pay extra. If you don’t pay the full amount within the period however, you will be charged an interest rate on top of what you’ve borrowed. The interest rate varies from institution to institution.
There are many types of credit cards available. Two of the most popular types are:
Standard credit cards
This credit card is as straightforward as it gets. No frills or complexities. Ideal for those who just wants to get transactions done.
Rewards credit cards
You can earn rewards on credit card purchases, including cashback, rewards points for later redemption, or even perks for travel.
The advantages of a credit card include:
- Being able to make big purchase by instalment method
- Great for emergency uses such as large medical bills or motorcycle fixes
- Offers cashback, reward points, special promotions (varies between institutions)
- Helps with building a good credit score
Both cards have their own set of pros and cons. For instance, owning a debit card makes it harder to overspend because you are limited to the total amount available in your bank account. That said, it is a better option for managing your money and only spending within your means. They too, offer the same convenience as a credit card, but skips the part where you borrow money, pay interest or fees on your purchases.
Meanwhile, with a credit card, you might risk spending beyond what you can afford if you’re not mindful of your spending. However, with enough discipline, a credit card can benefit you in more ways than one. It can help cover an emergency — allowing you a month to come up with the cash before the bill is due. This could be extremely helpful if you find yourself needing to pay for something big before a check comes in. Additionally, you could also earn rewards points and cashback.
No matter which you choose, it’s important to understand how each card works to decide which suits your lifestyle best.