When you get your first banking account and start managing your own money, you begin to hear a lot of new words and learn new financial concepts. One concept that people often become confused about is the difference between debit cards and credit cards. Which is understandable because debit cards and credit cards look and function in similar ways when making purchases. However, credit and debit cards are actually quite different from each other.
What is a Debit Card?
A debit card is a plastic card that holds information about your banking account on it. When you use your debit card to make a purchase, whether by swiping, inserting, or through Apple Pay, your debit card transmits your banking information to the store you are making a purchase at. The store then is able to pull the funds directly from your banking account. Generally, your debit card is tied directly to your checking account. This means every time you swipe your card you are instantly spending the funds in your checking account. Before debit cards people would need to write paper checks or use cash to make purchases in stores.
What is a Credit Card?
Like a debit card, credit cards are plastic cards but they are not tied to your banking account. A credit card is actually a type of loan called a line of credit. This means that when you make a purchase with your credit card you are borrowing money from the financial institution who issued you that card. The money you spend on your credit card must be paid back within a set period of time, usually 30 days, or you will begin to be charged interest. If you fail make payments to your credit card you risk damaging your credit score which can have lasting effects on your financial future.
Does a Debit Card Affect My Credit Score like a Credit Card?
The answer is no, a debit card does not affect your credit score. This is because debit card transactions do not appear on your credit history. With a debit card you are not borrowing money like you are with a credit card. When you use a debit card, the money is immediately taken out of your banking account, there is no credit involved.
When you use a credit card you’re building up a credit history which will have an impact your credit score. When used responsibly credit cards are actually a great way to start building a credit score. However, if you misuse your credit card and do not make your payments on time, your credit score will be negatively affected.
When to Use a Debit Card vs a Credit Card
There is not necessarily a right or wrong time to use a credit card vs a debit card to make purchases. However, there are some advantages and disadvantages that come with each payment option you should consider.
Using a Credit Card is Best When You:
- Are shopping online. This is because your purchases are protected under the Truth in Lending Act. This federal regulation states that consumers' maximum liability for unauthorized purchases on their credit card is only $50, and if a card is used online, it's zero.
- Make large purchases. Many credit cards offer their own warranty protection for your purchases just for using their credit card. Of course you will need to read the fine print of your credit card agreements to find out the level of coverage available from your specific credit card.
- Are traveling. While not all credit card are created equal, many credit cards offer additional fraud protection while traveling, as well as travel bonuses, like discounts on hotels. However, if you plan to travel internationally make sure your credit card doesn't charge a high foreign transaction fee.
- Are in a financial emergency. Using your credit card to cover large unexpected expenses, such as car repairs, can help you avoid depleting your savings account. Just make sure you stay on top of paying back what your borrowed to avoid future financial problems.
Using a Debit Card is Best When You:
- Are on a tight budget. Making purchases with a debit card can help keep you on budget because you can only spend the money you already have in your account. You can even set up your checking account to deny any charges that would cause you to overdraw your account.
- Buy from a small business. Business are charged a fee by credit card companies to process credit transactions. This is why you will often see small businesses that have a minimum purchase amount before they will allow a credit card payment.
- Can avoid a fee. Often times with credit cards there a fees that come with many transactions that debit cards do not impose. If your credit card company will charge a fee for a purchase, it's best to use a debit card instead. You will have to pay attention to your credit card agreements to know what these exact fees are.
Debit Cards vs Credit Cards
The process for using a debit card or a credit card is similar in that you can swipe, insert, or use a mobile wallet to complete your transaction with both payment options. However, that is where the similarities between credit cards and debit cards end. A debit card is a convenient way for you to access the funds in your checking account. A credit card is a loan that must be paid back with interest. As with any financial product or service there are pros and cons. However, once you understand the difference between debit cards and credit cards, you will be able to make informed decisions as to when it is best to use each payment option.