The differences between credit and debit cards

Understanding the difference between credit and debit cards can not only help you make better financial decisions, but it can also help you make better business decisions for your customers when they come to your credit/debit card machine.

Debit cards and credit cards have some similarities. They are accepted in the same places. They both offer convenient methods of payment. They will both work in a credit/debit card machine.

Bank account

A credit card is not linked to any bank account. It is a line of credit offered by a financial institution. It enables you to buy things immediately, and pay for them at a later date, subject to a pre-arranged limit. The cost of purchase is added to your account and you get a statement each month. When you do, you can choose to pay in full or pay a certain amount and spread repayments over time. You’ll have to pay interest on the balance, so the quicker you pay the less it costs you.

Debit cards provide instant transactions on both sides. The customer’s money is debited straight away, and the payment is received straight away. The card is linked to a bank account, whereby the customer can only spend what is in the account, including any overdraft facility. There is no pay later facility, or interest to pay.

Why is this important for businesses? Well, if a customer is paying by credit card there is less chance of a declined payment, especially with a large amount to pay. The credit/debit card machine you’ll use to process the transaction is the same, the way a customer pays is the same too.

Credit Score

Debit cards don’t help you build up your credit history. This is because no credit is offered and therefore there is no risk from your bank’s point of view. Keeping your finances in order with just a debit card does not make you a better credit risk.

Credit cards do help you build up your credit history, if you use it wisely. Pay off your balance each month and not only do you avoid interest but you also increase your credit score.

Why is this important for businesses? As people get more in tune with building up their credit histories, they may choose to pay even small bills with a credit card rather than a debit card, and then pay their credit card off with funds from their bank account when their statement comes through. If a customer asks your for advice, which can happen, you’re better placed to give them this advice.

Rewards

Very few debit cards come with a reward system for use. Therefore there is often not a lot to be gained from making a payment using a debit card.

Credit cards very often have a reward/loyalty scheme which encourages people to pay by credit card. This is because banks make less money from debit card customers than they do from credit card customers. Credit cards are highly sought after and the competition is fierce, so credit card companies have to keep coming up with better schemes to attract customers.

Why is this important for businesses? It’s important to understand shopping habits in order to increase sales. If you know a customer has a choice between paying by credit or debit card, you’re going to be able to up-sell other products on the basis that they can put it on their credit card and pay for it later, especially in the run-up to christmas.

So, now you know they key differences between credit and debit cards, you are much more able to give your customers help and advice when they come to spend money with you and use your credit/debit card machine.