Take a peek inside your wallet and tell me what you see. (Just pretend.) For most of us, there will be an assortment of cards and cash. And among that assortment, you’ll probably have at least one debit card and quite possibly a credit card.
If so, that means you’ve debated the differences between the two cards and come to the conclusion that — for whatever reason — you need one (or more) of each. But why? What’s the difference? Is there a difference? Let’s discuss...
What’s a debit card?
We’d imagine that almost every adult in Australia has a debit card. They’re one of the most common forms of payment, especially as we move closer towards a cashless society.
Not to be too basic, but a debit card is a small plastic card. The front of the card is usually printed with your bank’s branding, a 16-digit card number, your name, and possibly the logo of a payment network (such as Visa or MasterCard), if you have that type of card.
The back of the card usually features a magnetic strip and a signature panel. If you have a card connected to a payment network, it’ll also feature a 3-digit number aka the CVV number.
You can use your debit card as a payment method at most locations across Australia. These days, you can even “tap and go” without using your pin number (on purchases of $100 or less) if you have a card connected to PayWave or PayPass. (You can still use “tap and go” on purchases of more than $100, but you’ll also have to enter your pin number.)
What’s a credit card?
In many ways, a credit card looks and acts the same as a debit card.
All the features that we previously described can also be attributed to credit cards. Think: your bank’s branding, your name, card number, payment network logos, etc.
Much like a debit card, you should find you’re able to use your credit card at (most) payment locations in Australia. Likewise, many credit cards feature the same “tap and go” functionality.
How are debit cards different from credit cards?
Okay, so now you know that debit cards and credit cards are accepted at many of the same places, they tend to look similar, and they’re convenient payment methods for anyone who finds themselves short of cash or is regularly on-the-go.
But — insert the sound of a car screeching to a halt — that’s where the similarities end.
Difference: Where the money comes from
The core difference between debit cards and credit cards is where the card pulls the money.
Let’s say you’re at Kogan and you want to buy a new television. The television you have your eye on is $500. If you were to use your debit card for the purchase, the $500 would come out of the transaction account connected to the card. Because it’s a transaction account, you would have to actually have $500 in the account for the transaction to go through. (Unless you have an overdraft facility, in which case your purchase might be completed after all.)
Now, let’s say you want to put the Kogan television on your credit card. In this case, you don’t have to have $500 available. Essentially, your credit card will have a limit — say, $2,000 — and if you have $500 still available within that limit, you’d be able to buy the television.
So, free television? Not quite. You are going to need to pay that $500 back to your credit card, we’re sorry to say. Every month, you’ll receive a credit card statement that will state two amounts (among other things). One amount is the minimum payment amount (and a due date for that amount). If you only pay the stated minimum amount, every month, by the stated due date, you’ll eventually pay off the balance, but you’ll also pay a good amount of interest.
The other amount is your closing balance, which is the same as the total amount you owe. In an ideal world, you’d pay the total closing balance by the due date. If you were to do this each and every month, you wouldn’t pay any interest on your credit card purchases.
To sum up, the fundamental difference between debit cards and credit cards is where the funds come from when you make a purchase. With debit cards, the money is yours and it’s available. With credit cards, it’s a “loan” from your credit card to you, and must be within your limit.
Difference: Access to cash
The next big difference is all about access to cash.
Let’s say you’re out and about and you need access to $50 to repay a friend. If you have $50 in your transaction account and you have your debit card on hand, you can head to an ATM (or you can use an EFTPOS facility) to withdraw the cash straight out of your account.
But what if you only have your credit card on hand?
While you can technically withdraw cash from your credit card using an ATM, there are consequences. Firstly, you will likely be charged a cash advance fee. You’ll also be charged interest and this is typically at a higher rate. For instance, your regular interest rate might be 13% but your cash advance interest rate might be 20%.
In addition, you may have a withdrawal limit. For instance, your card might have $2,000 available, but you may only be able to withdraw $500 each day. Finally, you may also be subject to a maximum cash advance limit, such as $1,000 total.
A smaller (but no less important) difference is fees.
Many transaction accounts (linked to debit cards) charge a monthly access fee. This usually isn’t more than $10 per month. Some banks will even waive the fee if you deposit more than a certain amount per month or if you’re a student or pensioner (as examples).
Many credit cards charge an annual fee. This could be in the hundreds of dollars, depending on the type of card. Very few credit cards have no annual fee, although some have a deal where your annual fee is waived or reduced for the first year.
Difference: Overseas travel
If you’re heading overseas, the general recommendation is that you take a mix of payment options. For instance, maybe a mix of foreign cash, a travel money card, debit cards and credit cards. It will naturally depend on where you’re going and the access you have.
With that in mind, credit cards can usually be used in overseas locations. However, your debit card might not be functional. Typically, if your transaction account is linked to a payment network (such as Visa or MasterCard), you will be able to use your debit card in any foreign location that accepts Visa and MasterCard transactions — just like a credit card.
Difference: Online shopping + purchases
The same goes for online shopping and purchases.
If your transaction account is linked to a debit card, but that debit card is not linked to a payment network (such as Visa or MasterCard), you won’t be able to use your debit card for online shopping. In these cases, you’d either have to link a transaction account to a payment service such as PayPal, sign up for an online payment method such as Afterpay, or use a credit card.
Another difference worth noticing is whether or not your debit card or credit card gives you access to rewards programs — think Flybuys, Qantas Frequent Flyer, etc.
While there are a few debit cards that have rewards programs attached, these types of programs have typically been the wheelhouse of credit cards. Therefore, if you want to make use of rewards programs and accumulate points, you may want a credit card.
What to consider when choosing
Now that we’ve summed up the general differences between debit cards and credit cards, here’s a quick list of things to consider if you’re deciding whether you need one, both or neither:
- What are my current liabilities?
- Am I good at budgeting?
- Can I realistically pay off my balance each month?
- Do I want to join a rewards program?
- What monthly and/or annual fees will I be hit with?
- How often do I need to access cash?
- Do I make big purchases?
- Will I be travelling overseas?
- Do I shop online?