Credit and Debit cards

They may look visually similar, but there are some significant differences between how a credit card and a debit card work that are worth keeping in mind. When you’re weighing up your options it’s important to get all the facts and understand how each card could be a fit for your finances.

How does a credit card work?

Unlike a debit card, most credit card types are not linked to your current account. While a debit card usually takes funds from your account straight away, a credit card allows you to purchase things today and pay for them later. Every month you’ll receive a statement showing your outstanding balance. You can either pay the bill in full by a set date and incur no interest, or you may be able to make a minimum payment and spread the rest of the repayments out over time. It's important to remember that if you don't pay off the balance in full every month, you will be charged interest on the outstanding amount, and it will take you longer to repay the amount due.

How a debit card is different

Unlike the various credit card types available, with a debit card any money you spend is automatically taken from your current account. This means you must have funds in your account or an overdraft facility in place to cover the full cost of any transactions that occur. In some cases you may not be able to complete a transaction if there are no available funds.

What are the differences between debit and credit card transactions?

Whilst debit card purchases deduct money from your current account - from funds that you already have available – making purchases on various credit card types is slightly different. Credit cards run up an amount of money that you will owe in the future, a balance that you will be required to pay back at a later date. As mentioned above, an interest rate is applied to any balance that is not paid off in full by the monthly due date, which increases the total amount you owe over the long-term. It is therefore important to practice responsible spending when you decide to make credit card purchases, and to take stock of your personal finances to determine if you will be able to repay the full outstanding balance on time.