Understanding the Differences Between Debit and Credit Cards

Modak
September 30, 2024

Debit and credit cards are two types of plastic (or metal) cards that allow you to make purchases without carrying cash. Although they look the same and can be used similarly, the two have important differences. Read on to get some quick and vital info.

Debit cards

Debit cards are linked directly to your bank account, and the money is deducted from your account immediately when you make a purchase. This means you can only spend the amount of money you have in your account.

Let's say you have $50 in your bank account, and you use your debit card to buy a video game that costs $30. The purchase will go through, and your account balance — zap!—  will be (almost) immediately reduced to $20. Be aware, this means that you cannot “dispute” this charge with anyone. What’s done, is done. Moreover, your “limit” on your debit card will be the exact amount of money you have in your bank account at the moment you swipe. Be sure you don’t overdraft!

While it is incredibly convenient to pay with a debit card and not worry about paying a statement later, you do not and cannot build credit with a debit card. This is a major bummer, because you need to have a credit score later in life.

Advantages of Debit Cards

  1. Easy to Use: Debit cards are widely accepted, and you can use them to make purchases online, in stores, and even withdraw cash from an ATM.
  2. No Debt: Since debit cards are linked to your bank account, you can only spend the money you have, which means you can avoid debt.
  3. Budgeting: Debit cards can help you track your expenses and budget better since you can see exactly how much money you have in your account and where it's going.
Paying with a debit card

Credit cards

Credit cards allow you to borrow money from a lender, usually a bank, to make purchases. This is also known as a “line of credit.” Credit card companies set your credit line limit based on your income and other factors— not just on what you have in your bank account.  You then pay back the borrowed money at a later date. If you pay on time, you build a good credit score.

Let's say you use a credit card to buy a new laptop that costs $800. You swipe your card at the retailer, and boom, it’s yours. Absolutely nothing comes out of your bank account at that moment. You can buy the laptop on a Tuesday, even if your job doesn’t pay you until Thursday. Talk about convenience.

About 30 days or so later, depending on your card’s terms, you pay for that laptop and other purchases by “paying your credit card statement” with your bank account. Usually, you will have an option to pay your statement’s balance in full, or partially. If you pay the full balance by the due date, congrats, stud! You just rocked out using the advantages of credit cards in your favor. This is definitely the goal.

Beware though. If you can't pay the full balance by the due date, you will be charged interest on the remaining balance until it is paid off. This is essentially a fee you pay for the convenience of buying-now, paying much later. And, your credit score takes a ding. Worse, you can collect “debt” if you consistently don’t pay your statements. It’s good to set a reminder in your phone and be smart about the purchases you make. Simply put, don’t overspend, and pay on time. It’s that simple.

Even more enticing than having a gap-period between getting your goods and actual payment from your account is the ability to dispute charges. Did a restaurant accidentally put your charge through twice? Did a certain white sneaker retailer charge you for a pair you never received? You can dispute these charges with your credit card company. They can take it up with the vendor, while you sit pretty.

Advantages of Credit Cards

  1. Buy Now, Pay Later: Convenience is king here.
  2. Building Credit: Using a credit card responsibly (paying off on time, not spending past your limit) can help you build credit, which is necessary for things like getting a car loan or renting an apartment.
  3. Rewards: Many credit cards offer rewards programs that can earn you points or cash back for purchases you make, which can add up over time.
  4. Protection: Credit cards offer more protection against fraud and unauthorized purchases than debit cards since you're not liable for charges you didn't make.

While both debit and credit cards have advantages, it's in your best interest to understand their differences and use them responsibly, so you can start building a solid financial foundation for your future (and enjoying some perks in the meantime).

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