When placing credit and debit cards side-by-side, the differences can be hard to spot. They both identify themselves with a unique 16-digit number, hold a three-digit security code, and are pretty easy to forget at a bar… we’ve all been there, don’t worry. 🙃
The difference lies in how they interact with you, your bank account and your credit score. If you’re still only using a debit card for everyday expenses (yes, even that 2AM pizza run), you may be missing out on some of the long term benefits of a credit card.
But before we get into that, let’s make sure we’re all on the same page. 👇
What is a debit card?
A debit card offers you the convenience of spending the money you have in your bank account without having to carry around wads of cash in your wallet. 💰
Every swipe (or dipped chip) of a debit card deducts money directly from your checking account to pay for the purchase. And as your account runs out of funds, so does your card.
What is a credit card?
A credit card allows you to use borrowed funds to pay for goods and services. These funds are issued by a lender, and each cardholder is given a predetermined amount of money they’re allowed to borrow per credit cycle, known as a credit line.
What makes credit cards so useful is that you can get a credit line greater than the amount of money held in your bank account, allowing you to buy things and to pay for them later. Of course, credit cards are issued under the impression that you will pay back the amount you spend, or a portion of that amount, once a month. If you choose not to pay back the entire amount, the lender will charge you interest – which you can think of as a convenience fee for lending you the money for more than one cycle.
So... Why credit?
Borrowing money and paying it back later can be useful, but perhaps most valuable of all is the fact that credit cards can help you build up your credit score. If you ever plan to rent an apartment, buy a car, start a company, own a home, or *gasp* leave the family cell plan, a good credit score is something you should consider investing in.
Many of these big life transitions involve someone (or multiple “someones”) looking 👀at your credit score. This number is based on your credit history – otherwise known as your official record of borrowing money and paying it back… in a timely manner. And the higher your credit score, the more likely you are to qualify for better rates, rewards products, and access to additional financing.
Credit vs. Debit: Payments
Let’s revisit something - credit cards allow you to buy things even if you don’t have the money in your bank account, while debit cards only allow you to spend money you currently have.
Take this example:
Congrats! You got a new job and start in two weeks! Exciting right? Except you have to move to another state, find an apartment, sign a lease, pay for that apartment’s security deposit, fill it with furniture, appliances, and a long list of other last-minute additions you’ll forget to remember until the day of.
Don’t get carried away though – it’s important to note that you will accrue interest charges if you don’t pay your credit card bill in full on time, which can lead to unnecessary debt. But as long as you keep track of what you owe with each statement, credit cards can act as your personal savior in times of temporary financial burden.