The Difference Between Debit and Credit Cards
While debit and credit cards may look similar in your wallet, they have different purposes. Let’s take a closer look at debit and credit cards, so you can choose the best option for your financial goals.
A debit card is linked to a checking account, which holds funds you’ve deposited like paychecks or cash. Then, when you use your debit card, the money is immediately deducted from your account.
A credit card, on the other hand, is not connected to money you’ve deposited. Instead, it’s a revolving line of credit that you can use to borrow money for purchases or cash withdrawals. Then, you repay the money you borrow at the end of each month.
When selecting the best card for you, there are some important differences to consider:
- Credit Limit
All credit cards have a credit limit, the maximum amount of money you can borrow at any time. The limit is determined by the credit union or bank that funds your credit card, and some institutions charge fees if you exceed it. Exceeding the limit can also hurt your credit score. - Monthly Bill and Payments
With a credit card, you’ll receive a monthly statement that lists your purchases and the total amount you owe. You’ll be required to make at least a minimum payment by a certain date. - Interest on Unpaid Balances
If you don’t pay your entire credit card balance by the due date, interest will begin to accrue on the unpaid amount. You’ll then both have to repay your outstanding balance and the interest you’ve accrued, making your debt more expensive. - Missed Payments Impact Your Credit Score
If you don’t make your credit card’s required payment within 30 days of its due date, your credit score may be impacted. Late payments on a credit card can cause long-term damage to your credit profile. - Closing Accounts and Your Credit Score
Closing a credit card account can lower your credit score, as it reduces your available credit and can shorten your credit history. On the other hand, closing a debit card has no impact on your credit score because it’s not connected to your credit profile. - Building Credit
Using a credit card responsibly, by making on-time payments and keeping your balance low, helps build your credit. A good credit history is essential for securing loans, getting better interest rates and reaching your financial goals. In contrast, a debit card does not help build credit since it uses your own money. - Rewards and Perks
Many credit cards offer rewards, like cashback or points. These rewards can be redeemed for things like travel, gift cards or statement credits. Debit cards, however, rarely offer similar benefits.
While both debit and credit cards are convenient payment tools, they offer different benefits. Credit cards are useful for building credit and offering rewards, and they also require responsible management to avoid debt and damage to your credit score. Debit cards, on the other hand, are simpler and best for people who prefer to use only the money in their account(s). Understanding these differences can help you make smarter decisions about which card is best for your financial future.
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