Paying for the weekly supermarket shop, buying airline tickets for the next holidays… Credit and debit cards are often the preferred payment method for many consumers. However, we need to know the differences between them in order to know which is most suited to our needs.
Credit cards and debit cards are payment instruments that are usually linked to current accounts. The term “credit card” is commonly used to refer to both of them without distinction, but they each have different characteristics. Below we review the features of the credit card versus the debit card and the most frequently asked questions.
Funds available: how does payment with a credit card work?
When we talk about credit cards versus debit cards, the most important difference is that with credit cards the bank makes funds available to customers for their use, with an agreed limit.
This is known as “open-ended credit”, a method by which the bank lends money, where the user has a maximum amount available that they are not obliged to use in its entirety. They only need to repay the proportion that they have used, together with interest, if applicable. There is no need to sign a new agreement each time the user wants to use this credit.
NIR and APR, what role do they play in credit cards?
The NIR is the nominal interest rate and refers to the money we pay a bank for the funds they have lent us (the “principal”). The APR, on the other hand, is the annual percentage rate; it takes account of the fees and the term of the transaction, as well as the NIR. Both, but especially the APR, are important indicators to look at when comparing the credit cards offered by different institutions and knowing the costs of using each one.
An alternative to open-ended credit is closed-end credit, but this type is not used with credit cards. It is found in those loans in which the bank provides all the money as a lump sum, as is the case with mortgages or personal loans, which must be repaid over the agreed period together with interest. Once this money has been borrowed, more can only be obtained by taking out a new loan.
This situation – whether we have an open-ended or closed-ended credit – does not arise if we have a debit card, because with this we can only use the money we have previously deposited in our account. Once these funds have all been used, the card cannot be used as a means of payment.
In addition, its payment options are different to a debit card, with which money is automatically deducted from the current account when we pay the price of a product or service. With a credit card, consumers have flexibility to choose the form of payment. They may, for example, choose to postpone repayment to the end of the month or to split it into instalments – a method known as revolving credit.
However, with regard to the forms these cards can take, they are the same in both cases: today, credit and debit cards are available in both a traditional physical version, and a virtual version, which we can set up on smart devices such as phones or watches. We can then pay with the device, provided it has the features needed for this operation, especially NFC technology.
Associated charges: when you pay with a credit card, are you charged a fee?
In countries such as Spain, it is illegal for a company to charge a fee for payment by card, whether credit or debit. However, there are other fees, such as for issuance and maintenance, which apply in both cases, though more frequently with credit cards.
There may also be charges when we withdraw money from an ATM. Frequently, especially if it is the bank where we are customers, with debit cards we will not be charged fees, whereas the bank may charge interest on the money granted through credit cards. If, on the other hand, we want to withdraw cash from ATMs that do not belong to our bank, we will usually be charged a fee for the use of both types of card.
In addition, with credit cards, there may be other types of charges related to the interest on deferred payment, i.e. for postponing it to the end of the month or for splitting it, as described above. The failure to pay on time is also envisaged in these cases, with the card contract specifying after how many days of non-payment interest will begin to be charged. This varies depending on the bank, but many give the user a certain margin of time to pay the debt without penalty.
Lastly, there is penalty interest that is charged when the customer exceeds the amount the bank has agreed to lend, i.e. the credit card’s limit.
Insurance: what should you do in the case of credit card fraud?
In order to know what insurance is associated with our credit or debit card, we must look at the contract we have with the bank, where these conditions are set out. In many cases, debit cards usually have protection against theft, etc.; with credit cards, such insurance is extended to cover other cases such as accidents, travel, fraud, etc.
In any event, if we see suspicious activity on our current accounts or payments that we have not made, we should quickly bring it to the attention of our bank through the various customer service channels available.
However, in order to prevent possible fraudulent activities, it is highly recommended that you only use these cards in secure e-commerce environments. Moreover, if we have the digital banking app, many banks give us the possibility of turning the cards on and off with a single click, which means activating and de-activating them so that they can be used or not.