Whether you’re a newcomer to Canada or a student trying to build their credit, it’s important to understand the differences between debit cards and credit cards, two essential products in the Canadian banking system. Here’s an overview with the help of an expert.
“Debit cards and credit cards are both bank cards, or payment solutions, actually. But each one has its own features,” states Pascale Arès, Product manager, cards and payment solutions at National Bank.
They have few similarities as the pros and limitations vary from one type of product to another. Here are the main differences between debit cards and credit cards.
Debit cards are a payment tool that allows you to make transactions and purchases by taking money directly from your bank account.
Debit cards are a useful and secure tool to use whenever you want easy access to your money. “You’ll rarely see anyone pay for a $500 purchase in cash. Most people aren’t comfortable carrying around that much money in their pockets,” explains Arès. However, if you don’t have enough money in your bank account to cover the purchase, the transaction won’t go through.
Most banks, like National Bank, offer debit cards with contactless payment and mobile payment capabilities. “One important thing to note is that there’s often a payment limit for contactless transactions.”
Of course, debit cards aren’t just for transactions. “Among other things, debit cards allow you to withdraw and deposit cash, view your account balance, or pay a bill at an ATM. They also allow you to use online banking services.”
“It’s pretty easy. All you have to do is open a bank account and they’ll give you a debit card, which is sometimes referred to as a bank card. It’s not unusual to have to do an identity verification to open an account, but there’s no credit check needed to open a savings or chequing account.”
The daily limit on purchases or spending may vary from one bank to another. In some cases, you can request a temporary increase on the limit to make a major purchase, like to buy a car, for example.
Credit cards are another payment tool that allows you to make transactions. However, it gives you access to credit that you will have to pay off when you receive your monthly statement. “It’s best to look at a credit card as a method of payment rather than as a financing plan. While it does give you quick access to funds, it comes with an interest rate that’s usually higher than on personal loans. It’s a good idea to pay off your balance as soon as you can,” cautions Arès.
“Banks often sort their cards into different categories. More than one card may be available in a given category. The main categories include cards with no fees, travel reward cards, cashback cards, and low-interest cards.”
Some cards also come with annual fees. That’s why we recommend researching these fees before choosing a credit card.
Credit cards give you access to a predetermined amount of credit that you can use to make purchases or transactions; this is called a credit limit. Even though we recommend paying off your entire balance every month, you do have the option of only making the minimum payment. In that case, interest fees will be added to your purchase total every month.
It’s determined based on different factors related to the client’s credit file. “The limit may increase over time if you build strong credit. After a while, you could request an increase to your credit limit, or even lower it if you don’t think you need as high a limit as you currently have,” notes Arès.
Usually, a first credit card will come with a credit limit no lower than about $500. “You can still build credit with that much. Make purchases and pay them off quickly. Your bank will see that you’re using your card responsibly and after a while, you’ll be able to ask for a credit limit increase.”
“A debit card gives you access to all Interac® ATMs around the world. There may be fees related to this kind of transaction, so we recommend checking with your bank to find out about any foreign transaction fees before going on vacation,” Arès continues.
You don’t incur any management or interest fees when you use a debit card. However, there are transaction fees for clients who don’t have a package. For a set monthly fee, you can sign up for an account package of your choice to reduce these costs. If you exceed the transaction limit included with your package, additional fees may apply.
In terms of accessibility, credit cards allow you to shop online – in particular, you can save your card details on your favourite websites, or even do so by phone, for easy checkout. They’re also generally accepted around the world. As with debit cards, there may be foreign transaction fees. It’s best to look up these terms before using your card abroad.
You benefit from anti-fraud protection with your credit card, meaning you won’t be responsible for unauthorized purchases made with your card in the case of a fraudulent transaction. Furthermore, when you pay with your credit card, you have additional options for recovering your money if the good or service you receive doesn’t correspond to what you paid for.
Many credit cards offer benefits, such as reward or cashback programs. Some also offer travel insurance or protection against theft or damage for items purchased with the credit card.
“It also comes with insurance that can extend the manufacturer’s warranty. For example, let’s say you buy a toaster with your credit card, and it’s covered by a one-year warranty. You can extend this warranty simply by purchasing the appliance with your credit card. There are exceptions, however, such as smartphones, which aren’t covered by this kind of insurance. We encourage you to take a look at your insurance coverage before making any major purchases.
Lastly, credit cards are a great way to build your credit. If you’re a newcomer, you could start by opening a chequing account to get a foot in the door of the Canadian banking system before applying for a credit card.
Debit cards also have limitations. “Even at a time when people are shopping online more and more, debit cards are rarely accepted for online transactions.”
If you’re a newcomer trying to build your credit in Canada, using a debit card won’t have any impact on your credit score. “If you have major goals like buying a home or a car, banks won’t grant you any financing based on how you use your debit card.”
Credit card interest rates are usually pretty high. “It’s a payment tool that requires discipline. You should pay off your bill quickly, or at least make the minimum payment every month.” It’s important to understand how credit cards work and how their interest rates are calculated.
“It really depends on your needs and how you plan on using it. Are you a student, a young parent, or an entrepreneur? Advisors can help you sort out all the different credit cards and help you choose the best one for you,” Arès concludes.
Ready to learn more about our cards? We’re here to answer your questions.
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