Debit and credit cards are a type of short term debt finance used for transactions (purchases that need paying at the time of sale).
Against an annual service charge, credit card holders can draw on a credit limit approved by the card-issuer (e.g. a bank or service provider). If the transaction exceeds the credit limit of the cardholder's account, it’s not completed. Cardholders must pay for credit card purchases within 30 days to avoid interest and/or penalties.
Debit cards are also used in cash transactions. Unlike credit cards, a debit card withdraws the money for a purchase from the available balance in the cardholder's account. If the available funds are insufficient, the transaction is not completed.
Social business debit and credit card advantages and disadvantages
A social business may be wary of using cards as this can lead to lack of control over spending. Good governance will help establish clear guidelines around spending. Combine this with an appropriate monthly spend limit to keep control of costs and cash flow within your Finance Department.
The high interest rate if you miss paying off the balance on the card at the end of the month is the biggest disadvantage of credit cards. Costs can escalate if you end up using the credit card's credit limit as a form of loan.
Credit cards and debit cards allow you to pay for goods and services quickly and easily without going through the Finance Department. If you need the credit card for debt finance beyond the monthly repayment date, we suggest you seek other forms of finance immediately.