What is the difference between a credit card and a debit card?

What is the difference between a credit card and a debit card?

The question of what’s the difference between a debit and a credit card is a common question these days, especially with the rise of debit cards that have a credit function. The difference is primarily functional and would help you decide the times when it’s best to use a debit card or a credit card.

Various banks issue both debit and credit cards that use Visa or MasterCard as the payment processor whilst the banks supply the funds. American Express (AMEX) is another provider of credit cards that some people prefer, they act as both the issuer and the payment processor.  

Some merchants may not register for all types of cards which would mean your preferred card may not be accepted. So, practically speaking, it’s always good to have multiple payment types, including both debit as well as credit cards handy in your wallet.

When it comes to the difference between the two types of cards, physically, they are quite similar. Both are plastic cards with 16-digits and your name on the front and a magnetic stripe on the back. The similarities also include how they can be used. Both credit and debit cards, if they’re Visa or MasterCard debit cards, can be used for internet transactions. But this is where the similarity ends! To get a better understanding of what’s the difference between a credit card and a debit card, you should look at the features, benefits, and uses of both.

How to tell the difference between a credit and a debit card

  • Features of a debit card 

A debit card allows you to access your own funds held in your transaction account, either through an ATM or at a retail outlet. Most banks provide a debit card, free of charge with any new transaction account. These days most debit cards can also be used as credit cards for online payments but using your own funds. There is no interest charged for using your debit card as you’re using your own money, but you may have a daily withdrawal limit.

This limit is put in place as a safeguard to reduce the risk of misuse of your debit card and to help protect you from any unlawful transactions. As long as you have money in your account, you can spend it and some banks will allow you to overdraw a small amount but may then charge interest if this is not corrected. Some debit cards also offer you rewards for spending, but it’s not a standard feature. When you open a transaction account with your bank, you can ask about the debit card options the account offers. 

  • Features of a credit card 

A credit card, as the name suggests, is a card that offers you credit like your own personal line of credit. This can then be used for spending up to whatever limit agreed to by you and your bank or card issuer. A credit card usually comes with additional costs such as annual fees, interest charges and other possible fees and charges. If you only use your credit card in times of emergency or repay the full amount each month most of these charges won’t apply.

You may look at finding a credit card with a low or no annual fee if this is the case to save on long-term costs. When you sign up for your credit card, a spending limit is set which you can then increase or decrease by applying with your bank. There is also a minimum payment that you have to make each month to help repay and the debt you’ve accrued. There is also a range of credit cards with rewards programs that are linked to spending. However, these may cost more both in terms of fees and interest rates. You’ll need to complete an application and evaluation process before getting a credit card that’ll include reviewing your credit history.

Credit card advantages and disadvantages

Having a credit card can bring with it a host of benefits like reward points on eligible purchases, cashback, cashless shopping, and even the possibility of an interest-free credit period. It can also be a smart financial decision as it helps you build up a good credit score if you use your credit card sensibly and make payments on time. Building up your credit score will prove to be an investment for the future if you ever need to apply for a loan like a home loan, a personal loan or a line of credit.

It’s also important to consider what the purpose of you owning and using a credit card is. It may be that having a credit card in your wallet gives you a sense of financial security. You feel safe in the knowledge that you’ll be able to make that crucial purchase if the need arises and you don’t have the funds in your bank account. Another reason for choosing a particular bank’s credit card could be attractive rewards but be careful; these rewards don’t encourage overspending. 

However, you need to remember the risks of having a credit card. There is the possibility of overspending if you know you have the card there.  You also have to be mindful that if you default on or delay your credit card payments, you’ll create a bad credit score for yourself. 

Debit card advantages and disadvantages

A major advantage of using your debit card is that you’re utilising the money in your bank account without withdrawing cash or sign cheques. Unlike a credit card, you’re not likely to overspend as you cannot spend beyond the funds in your account, which helps you stay within your budget.

Since there is often no cost attached to a debit card, you can use it freely without ever having to worry about ongoing fees or interest charges. Even if you’re ineligible for a credit card, you can still have a debit card which is a Visa or MasterCard. This card can then be used in the same way as a credit card but uses the funds in your bank account.

It’s always safer to have a debit card in your wallet rather than carrying large amounts of cash on you. Cheques are no longer widely used and often come with delays. Using a debit card doesn’t affect your credit score or history but using a credit card irresponsibly affects both.

When it comes to the difference between a credit card and debit card, both have their pros and cons. It is observed that the younger generation prefers to use credit cards, and the more conservative spenders tend to use debit cards. 

The key component to the debate of credit vs debit card is you, so you should do your research and even compare credit cards or transaction accounts online.

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Learn more about credit cards

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

Can I transfer money from my American Express credit card to my bank account?

If you’re an American Express credit card customer, you may not be able to transfer money from your credit card to your bank account. However, you may be eligible for cash advances, which involves withdrawing money through an ATM. 

To qualify for a cash advance, you’ll likely have to enrol for American Express Membership Rewards. Consider checking your online credit card account to see if you can withdraw a cash advance and, if so, the fees and charges you’ll incur for this transaction. 

You should remember that cash advances are different from balance transfers, which were available with some American Express credit cards earlier. Balance transfers allow customers to consolidate debt from high-interest credit cards to a credit card offering a lower interest rate. If you only recently applied for an American Express credit card, balance transfers may not be available irrespective of the card you own. 

Does ING increase credit card limits?

You may want to increase your credit card limit for many reasons, such as having access to more spending money. However, if you are using the Orange One credit card issued by ING, you may not be able to do so. 

ING customers can choose a credit limit of their preference when applying for the Orange One credit card. Depending on your financial situation, this limit can be anywhere between $1,000 and $30,000. If you qualify for a Rewards Platinum card, the minimum credit card limit will likely be $6,000. 

Ideally, you should set your credit card limit knowing how much you can afford to repay each month and keep your expenses lower than this level. With most credit cards, you should have the option of requesting a credit card limit increase at a later time, although you will need to qualify for any increase. With an ING credit card, limit increases are out of the question (at the time this was published), which means you may want to apply for a higher credit card limit from the beginning. Remember that you have the option of decreasing your ING credit card limit at a later time.

How to increase my Commonwealth credit card limit?

Commonwealth Bank credit cards are extremely popular in Australia for everyday purchases and big ticket items alikers. A number of the card’s functions can be customised, depending on your needs and desires. If you wish to increase your Commonwealth credit card limit using the CommBank, you can usually do so on the app or via NetBank.

In the CommBank app, tap on the ‘Cards’ icon and choose your credit card. Then, click on ‘Credit Limit’ and select the ‘Increasing your limit’ option. If you don’t have the CommBank app, you can also increase your Commonwealth Bank credit card limit through NetBank. Simply log on and go to Settings, then click on ‘Product Requests’ and then choose ‘Credit Card Limit Changes’. 

Once the bank has received your application, they will review your account and payment history. Based on this assessment, your application will either be approved or denied. If approved, your new limit will be applied to your card instantly. 

While increasing your credit card limit may be an easy process, it’s important to remember that you should only request limits that you can manage. A high limit increases the risk of having a larger debt, even with cards that provide low-interest rate options. So, it’s important to think carefully and seek advice from people you trust before increasing your Commonwealth Bank credit card limit.

How do you apply for a credit card?

You can apply for a credit card online, over the phone or in person at the bank. Once you’ve compared the current credit card offers, the application process is quick and easy. Before you get your application started, you’ll need to gather your personal information like proof of ID, payslips and bank statements, proof of employment and details of your income, assets and liabilities. To be eligible for a credit card, you’ll need to be an Australian citizen over 18 and earn a minimum of $15,000 each year. Once you’ve applied for a credit card, you should get a response fairly instantly. If your credit card application has been approved, you should receive a welcome pack with your new credit card within 10-15 days.

How do I apply for a BOQ credit card limit increase?

If you’re an existing BOQ customer, you can request a BOQ credit card limit increase over a phone call. However, you should remember that owning and using a credit card is a matter of financial responsibility, so it might be worth thinking this decision through. 

When requesting a credit card limit increase, you’ll need to be just as responsible in terms of how much you earn and can set aside to repay the outstanding card balance. A credit card company may approve a credit limit increase only if you can show that you have either the income or the disposable income, which is the amount you have left after all expenses have been paid out.

For this purpose, you may need to submit your latest income documents and bank statements for an increase. You may want to estimate how much you usually have left after deducting your expenses, and then use this amount to try and convince the credit card company. Also, you may prefer to pay off the card balance in full each month and thus avoid paying interest on the card, helping you back up any claims of financial responsibility, as well. 

Remember that you may not be able to apply for a credit card limit increase beyond any limitations on the type of card you own. For instance, if you own a card whose ceiling is $10,000, and your current limit is $5,000, you won't likely be able to apply for a $10,000 credit card limit increase.

How to get a credit card for the first time

A credit card can be a useful financial tool, provided you understand the risks and can meet repayment obligations.

If you’re a credit card first-timer, review your options. Think about what kind of credit card would suit your lifestyle, and compare providers by fees, perks and repayments.

Once you’ve selected a card, it’s time to apply. Credit card applications can generally be completed in store, online or over the phone.

When you apply for a credit card for the first time, you must meet age, residency and income requirements. As proof, you must also provide documentation such as bank account statements.

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.