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Credit Cards vs. Debit Cards

Paying with plastic: it’s all the same, right? Wrong. Both credit cards and debit cards are useful and convenient means of payment, especially in the way most consumers shop today. However, it’s crucial to understand the differences between these two forms of payment in order to know when to use each one and why.

  • Debit cards immediately deduct funds straight from your bank’s checking account. Depending on your agreement with your bank, if you don’t have sufficient funds, your bank may charge you an overdraft fee or refuse to pay the charge altogether. Therefore, it’s important to have ample funds in the bank account associated with your debit card before you use it, and also to track each purchase so you’re never caught by surprise.
  • Credit cards allow you to borrow money against the line of credit your credit card company has given you. Your line of credit is typically the maximum balance you can have on your credit card. If your purchases remain within your maximum balance and you’re in good standing with your credit card company, the merchant will approve your credit card transaction. Depending on your agreement with your credit card company, you’re responsible for paying at least your minimum payment on your credit card balance each month.

Carry over balances and the credit card company will charge you interest, which is based on your credit card’s Annual Percentage Rate (APR). If your credit card has an APR of 15%, for example, a beginning balance of $1,000 becomes approximately $1,013 at the end of a monthly credit card statement cycle when interest charges are applied. If you don’t pay off your credit card in full at the end of each month, you become responsible for paying these interest charges, which can really add up over the course of months, or even years. Carrying a balance that’s greater than a third of your credit limit can also damage your credit score.

Reasons to Consider Getting — and Using — a Credit Card

Even though you run the risk of accruing interest payments when using a credit card, using one has its perks. For example, responsible use of a credit card can help you:

  • Build your financial independence. It’s always ideal to pay with cash. You don’t want to overextend yourself with purchases you can’t afford. However, paying in credit can be appropriate if you need to keep extra cash on hand until you get your next paycheck. Just be sure to pay off your balance each month to $0 so you don’t have to pay unnecessary interest charges.  
  • Establish and build a positive credit history. Future landlords and lenders like to see your history of making and paying off purchases, which is why they’ll check your credit history before letting you rent an apartment or take out a vehicle or home loan from them.

Best Practices for Using Credit Cards

To set yourself up for success when using a credit card, it’s a good idea to research credit cards, read their terms carefully and choose a reputable one with no annual fee, the lowest APR you can find and even added perks, like cash-back rewards or airline miles. Credit cards designed for students may also offer rewards for purchases you make at merchant websites for textbooks, furnishings and supplies.

Once you have your credit card, use it wisely. Pay your balances on time and in full each month to avoid paying interest and late-payment fees. Don’t rack up too much credit card debt, but in the hopefully rare event you’re unable to pay off your full balance for a month or two, pay more than the minimum payment whenever possible, as early in the billing cycle as possible so you’ll accrue less interest. Also, stay well under your credit limit, avoid taking cash advances and check your credit by getting a free report at least once a year from a resource such as annualcreditreport.com.

Reasons to Use a Debit Card

You can’t build a positive credit history if you only use a debit card. However, debit cards can come in handy, such as when you’re making small purchases from independent businesses, since merchants pay lower transaction fees for debit purchases than they do for credit card purchases. It’s also better for you to use a debit card if you’re not great about paying your bills on time, or if your maximum credit card limit too often tempts you to spend too much money.

Plastic Has its Perks

Credit cards and debit cards are financial tools you can use to manage your money. Understanding how they work, their terms and how to use them wisely can help you establish and maintain a positive credit history. Having good credit not only feels great, but also benefits you with more favorable credit and lending terms and conditions in the future!


Created and compiled by Rachel Rue, cuLearn and a talented writer/editor


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