Understanding Payment Cards: Credit & Debit

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Published: 25th June 2015
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Whether you are established in the working world or just starting out it is always important to keep on top of your finances and to understand what payment methods are available to you. Using the right type of payment method can save you time and effort but can also offer extra benefits and added security. Although cash is still a hugely popular payment method, especially for smaller purchases, many people prefer to use a credit card or a debit card. But what is a credit card and a debit card and what is the difference between them? This article aims to provide an introduction to credit and debit cards and offer some tips about when and how you should use them.

A debit card is linked to your current account and is a way for you to electronically access the funds. The debit card really began to take off in the mid-1980s when banks started issuing them to try and reduce the overuse of cheques, which are expensive for the banks to process. With a debit card you can use a cash machine to quickly and easily withdraw funds from your bank account. You can also use a debit card to pay for items in a shop, or for most types of purchase, e.g. in restaurants, for tickets or at a petrol station. One thing you will have to bear in mind is that because the money is taken from your account you will need to make sure you have the money in your account to cover the purchase. If you don’t have the money but you still want to make the transaction you will need to have an agreed overdraft with your bank. Where possible try not to go into your overdraft as you will often have to pay interest on the amount you used. When you use a debit card a hold is put on the amount you are trying to spend and the transaction is then sent to the banks involved and the funds are transferred.

Debit cards are hugely useful and it has been estimated that we use our debit cards around six times a week. They are best used to purchase everyday items that are not too expensive but are also a simple way to access cash. Although you can use a credit card to withdraw cash it is not a sensible idea as there are fees for doing this and you will be charged interest from the date that you withdrew the money. A debit card is best used to withdraw cash as you will be taking out your own money, and not borrowing it, and in most cases it is free to withdraw money at a cash machine with a debit card. Generally you should use a debit card for purchases that you know you can afford to pay for from your own money.

A credit card is similar to a debit card in that it can also be used to make purchases. However, there are several key differences between credit and debit cards. A debit card is linked to your bank account and any withdrawals or transactions that you make will be deducted from the total in your bank account. A credit card, on the other hand, is not linked to your account and is essentially a way of borrowing money from your bank. When you sign up for a credit card you will be given a specific credit limit. This ‘limit’ designates how much money you are able to borrow every month. When you buy something with your credit card the cost is added to your credit card statement, you receive this statement at the end of the month which tells you the total amount that you owe. You can either pay the full amount or you can spread the repayments over a period of time. It is advisable to pay off your credit card bills as soon as possible because the sooner you do the less interest you will have to pay.

Credit cards are generally most appropriate for bigger purchases - this is because you can choose to pay back the money over a period of time making it easier to deal with and because there is added protection with a credit card. If you purchase something expensive that turns out to be defective or if an internet site that you have bought something from turns out to be dodgy then most credit card companies will provide purchase protection. The credit card company will be jointly liable with the merchant to ensure that the item you bought is as described. You can use a credit card to pay for holiday flights or to rent a car, but some people do use their credit cards for smaller purchases. It can be useful to pay for your petrol or your weekly shop and pay off your credit card bill straightaway as you will not have to pay any more interest and you can benefit from any rewards offered by the credit card company.

Most credit card providers will offer certain rewards and offers in return for using their credit card service. For example some retailers and supermarkets will offer discounts or vouchers when you use their credit card. For example some retailers give you a certain amount of points for the amount that you have spent on the card, these points can then be turned into a voucher when you have accrued enough. Some credit card companies offer cash-back deals while credit cards offered by major airlines may give you air miles. The main thing to remember, however, is to not get sucked in by the variety of rewards on offer and to always try to pay off your bill as soon as possible.

© Izzy Evans 2013

If you would like to find out more about what credit and debit cards are and how they can be used then you can visit Pay Your Way which is an information site run by the Payments Council.

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