Finance Questions Explained Simply

Simple explanations with no jargon

Debit Cards and Credit Cards

on January 17, 2012

In this post I’m going to explain the difference between a debit card and a credit card.

Debit Cards

If you have a bank account already you will probably have a debit card.  Most high street banks such as Natwest, Barclays, Royal Bank of Scotland etc. issue debit cards.  A debit card is simply easy access to money you already have, so if you have a job and your wages are paid into your bank, you can use your debit card to draw your money out either at the counter in the bank or at a cash machine.

There is usually a limit on how much you can draw out.  This helps to prevent anyone from stealing all  your hard earned cash if your card and pin number should fall into the wrong hands.  The PIN number (Personal Identification Number) is 4 digits long and banks recommend that you don’t use famous historical dates such as 1066, which if you are unsure, was the year the Battle of Hastings was fought.  Anyway, I’m getting away from the subject.

When you put your debit card into a cash machine you will be able to see how much money you have available to draw out.  If you have an overdraft facility with your bank, you will be able to draw out more than you actually have as an overdraft is basically the bank letting you borrow money you don’t have from them.

It’s a good idea not to go overdrawn if you can help it as many banks will charge you a fee for using your overdraft facility.  I’ll talk about how to manage your money in another post soon.

Credit Cards

This is where it can get tricky for a lot of people.

Many people find that they can’t afford everything they want, so they get a credit card.  Unless you can afford to pay off your credit card in just a month or two, this is the best thing you can do with it:-

That’s because the credit card companies charge high rates of interest for letting you borrow money from them.  ‘So what’s interest rates’ I hear you say?  Well it’s a fee which is worked out as a percentage of the amount you have borrowed.  They call it the ‘APR’ or ‘Annual Percentage Rate‘ which is the interest rate for a whole year (annualised), rather than just a monthly rate.  You will often hear of people looking for the best deal – and that means a card with a low interest rate.  They work out the interest on the amount you owe and add it on – that’s how the credit card companies make their money and why people find it hard to pay off their debts – especially if they are paying a very high rate of interest.

Credit card companies such as Barclaycard, American Express, Virgin and the like may offer deals such a ‘Zero per cent on balance transfers’.  What they are trying to do here is get you to switch from a credit card company where you might already owe, say £1,000 or more, to their credit card by not charging a fee for say the first 12 months.  If you can be confident that you can pay it off in a year then it might be worth going for but beware – there is often an up-front fee for making the switch.

If at all possible, the best thing to do is not get a credit card and save up for what you want, otherwise you might find yourself owing more and more money – this is what’s known as ‘getting into debt’.

Well, that’s all for tonight.  Please do let me know if you have any questions.

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