Credit Versus Debit – What’s the difference?
You’ve probably noticed a lot of people paying for purchases with what looks like a credit card rather than cash. Maybe you’ve even seen your parents do this with their debit or credit card before. But what a lot of students may not realize is there is a big difference between a debit and a credit card.
Since you have to be 18 before you can get a debit card or a credit card*, many advertisers target students as they get close to turning 18. Students receive lots of offers for credit cards, so this information will help you plan for your best option when you turn 18 and are eligible to get a card of your own.
What is a Debit Card?
A debit card is a quick and convenient way to access your checking or savings account (you may even hear people call it a check card). Sometimes, debit cards are set up as an ATM card too, so you can get cash from a machine while you’re out. These convenient cards allow you to make purchases at the mall, a restaurant, and anywhere else you like, as long as you have enough money in your account. The key thing to remember is that when you use a debit card, you must have the money in your account first. It’s always best to track your purchases, just like you would if you were writing a check. You may notice that you have an option when you use your debit card to “run as credit or debit.” This refers to your option to use your PIN (personal identification number) or signature to authorize a purchase, not to the type of transaction.
What is a Credit Card?
Each time you swipe your credit card you are actually taking a loan called a line-of-credit. You are borrowing money from your financial institution. They pay for your purchase, and then you pay the financial institution back with interest. By signing up for the card, you agree to the terms of the loan and the interest rate charged – called the Annual Percentage Rate or APR. It’s important to remember that when you use a credit card, you’re borrowing money, not spending money you’ve already saved. Your credit limit is the maximum amount of the loan you can borrow, not how much you can spend. When you use a credit card, you must pay back the full amount plus interest*.
Which one should you use?
When you’re trying to figure out which option is right for you, consider the pros and cons. Your final choice will depend on your unique situation and what serves your needs best. Depending on your purchase and your situation, each card has benefits and drawbacks.
Debit Card
While debit cards provide easy access to money you’ve put in your checking account, the card also makes it easy to overspend and use up all the money in your account. That’s why monitoring your account balances is so important. Since debit cards are not a loan, using them for purchases will not help you build your credit or credit score, which is based on your borrowing habits. Debit cards can be a safer option because you must have the money in your account before you use the card to buy something. In fact, new regulations prevent you from spending more than you have in your account unless you ask your financial institution for permission in advance – this is called opting-in to overdraft coverage.
Pros
- Easy access to your money
- Easier than writing a check
- Some cards can be used at the ATM
- You must have money in your account to use it (unless you’ve opted in to overdraft coverage)
Cons
- Potential to overuse and spend all the money in your account
- Doesn’t help you build your credit
- Is not a loan – if it’s an emergency and you don’t have money in your account, you’re out of luck
Credit Card
One of the primary benefits of a line of credit is that your credit card allows you to make a purchase without having the money already in your account. This can be a convenient tool when you properly plan and budget. Credit cards are often used as a tool for consumers to build or establish their credit history. Since credit cards are a loan, using and repaying them responsibly can help you build a strong credit history. However, without proper budgeting and monitoring of your account, credit cards may lead to overspending and increased debt. Always make sure you plan ahead when using a credit card.
Pros
- Convenient access to your line-of-credit
- Easy to use in case of emergency
- Can help you establish your credit history
Cons
- Potential to overspend money you don’t have
- It is a loan – you have to pay it back with interest
- No protection from overspending
If you need more information about debit and credit cards, Wright-Patt can help you figure out what’s right for you.
*In accordance with the Credit Card Act of 2009, borrowers applying for a credit card under the age of 21 must either show proof of "ability to pay" or have a qualified cosigner over 21 years of age.