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Credit Cards vs Debit Cards

Learn about the pros and cons of these cards, to help you decide which may be the best option for you.

The majority of Singaporeans have access to both debit cards and credit cards. There are a number of key differences in the way these cards work. On the other hand, there are a few similarities: both cards allow you to make purchases, whether online or offline, without using cash.

Use this guide to understand the differences you need to be aware of before settling on a card that’s suited to your personal circumstances.

So, what’s the difference between a credit card and a debit card?

The main difference between a credit card and a debit card is that a credit card lets you borrow now and pay later for goods and services. A debit card only lets you make purchases with money that’s available in your bank account. Both cards can be used as a convenient way to meet day-to-day spending or for bigger purchases. Keep in mind that, with a credit card, you’re borrowing money and so you’ll be charged interest on what you owe – unless clear your balance in full each month.

Let’s take a look at some of the main differences between credit cards and debit cards.

Costs and frozen funds

When conducting a credit vs debit card comparison you will find that debit cards usually are cheaper than credit cards since they don’t have as many fees attached to them. Additionally, since you are using your own funds, you won’t have to pay interest. However, it is worth noting that debit card transactions usually incur a fee on each transaction at a retailer, also referred to as a point-of-sale fee.

Additionally, when you use a debit card, you will find that a certain amount of funds will be frozen in advance. This happens most often with hotels, restaurants and entertainment venues where a certain amount of funds will be frozen beforehand according to an estimation of what your expenditure might be. While the funds will not be removed from the account, you will still not have access to them until payment is made. This is a security measure to ensure you have sufficient funds available to pay your bill.

Freebies, rewards schemes and product warranty protection

Another difference you will find when doing a credit vs debit card comparison is that debit cards don’t offer the wide range of rewards programs or freebies that credit cards do. While these issues may not be important to some, for other people they can be extremely valuable, especially those who travel a lot. This is because one important feature that debit cards lack is the availability of travel insurance.

Travel insurance on credit cards might be limited but it can still be useful since it covers problems with airline travel – missing a connection can be painful and is not as rare as you might think -, hotels, car hire and more.

Additionally, many credit cards offer product warranty protection on large items, such as household appliances, that were purchased with the card. This reduces any risk you might incur on buying high-ticket items and is something that debit cards rarely offer.

Another issue you need to remember during your credit vs debit card comparison is that credit cards are accepted by a larger number of retailers across the globe while debit card transactions are limited. In fact, if you travel a lot, finding a point of sale that will accept your debit card can be extremely frustrating.

Compare different range of credit cards options

The rewards game

Note that in the last two consumer profiles, the operative phrase is if you use it right. Rewards programs are often in place to tempt otherwise responsible consumers to spend a little more in order to get something back. If you’re just $50 away from a free gift, so you pick up that $60 pair of jeans. In effect, you bought your free gift for an extra $10, even if you get to keep the clothing. If you’re overspending to get free miles, concert tickets, or a cash-back reward, then you’re not really on the winning end.

Some debit cards have rewards programs, but they’re not as attractive as those attached to credit cards. This is because they have a lower profit margin; that is, the bank can’t charge the same fees and penalties as they do with borrowers. There’s less incentive for them to give away free stuff when it’s less likely that they’ll get the money back in interest.

Getting around

Avid travellers can hardly picture themselves without a credit card, even if they can afford to carry wads of cash across continents. Credit cards give them access to first-class lounges, elicit VIP treatment at hotels and restaurants, and sometimes even pays for their trips, thanks to frequent flyer miles. This is one of the biggest come-ons of credit cards, although like in-store rewards, the math may end up working in the bank’s favour if you’re not careful with how you pay back what you borrow.

On the road, however, credit cards offer some real advantages. Visa and Mastercard are accepted worldwide, and American Express Credit Cards are gaining ground. Many Singapore debit cards will work overseas, but fewer establishments support them. NETS, the payment network in use in Singapore has even more limited coverage.

Play it safe

If financial prudence is a priority of your list, then you may want to stick to debit cards. There’s no risk of being penalised or caught in a spending spree—you simply cannot buy once you’ve spent all your money (overdraft protection can tide you over temporarily, but not for long). Of course, it’s for that same reason you might want to keep a credit card on hand anyway. Most experts suggest having an emergency card with a good credit limit ready at all times, so you don’t find yourself at a complete loss.

At the end of the day, debit and credit cards aren’t really competing for attention—there are markets for both of them, and as we’ve mentioned, most Singaporeans carry both anyway. Think of them as a financial tag team: you use one for everyday spending and maybe the occasional perk, and the other will have your back if something goes wrong.

How to find the best debit card

Ask yourself: what type of consumer am I?

Mint.com, a financial management tool, classifies consumers into four types. The first two carry credit card balances from month to month, but either pay on time or frequently miss their deadlines. These two are the credit companies’ biggest victims—they’re the ones at the mercy of interest rate fluctuations and arbitrary increases. If you’re one of them, switching to debit for the bulk of your shopping may be a good idea.

The other two types are the light and heavy users who carry no balances and always pay on time. Often, their main reason for using credit cards is the rewards program. In this case, credit cards are more practical—you don’t pay interest, and if you use it right, you get a choice of cardholder perks such as fuel discounts and complimentary travel insurance. Learn more about rewards program here.

Bottom line – credit cards vs debit cards

There are a number of pros and cons to consider when looking at both credit cards and debit cards. When used in the right way, credit cards offer a host of rewards – including freebies – that can make your spending go further. Meanwhile, debit cards are more beneficial for cash withdrawals and don’t always involve building up debt.

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