What Everyone Should Know About Debit Vs. Credit

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Credit cards and debit cards look almost the same. Beneath the surface, however, debit and credit are two very different things that serve their own unique purpose.

Here is what everyone should know about debit versus credit.

Debit Cards

Debit cards are payment cards that use money directly from the user’s checking account to make purchases. Debit cards are very convenient to use and typically have limited or no fees associated with having the card.

There are three different types of debit cards:

  • Standard debit cards, which pull money from a bank account.
  • Electronic Benefits Transfer (EBT) cards, which allow users to use benefits to make purchases. State and federal agencies issue EBT cards.
  • Prepaid debit cards don’t require a bank account. Instead, the money is pre-loaded onto the card and often has activation and usage fees.
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When using a debit card, the only money you can access is what is in the associated account. If you overdraw your account, you will face penalties.

Credit Cards

Credit cards, on the other hand, are issued by a financial institution, like Bank of America BAC. It establishes a line of credit for a certain amount that the cardholder can then borrow from the institution. The users must pay back the amount in full each month, or face interest fees on the unpaid balance.

There are four different types of credit cards:

  • Standard cards, which only allow the cardholder access to a line of credit.
  • Rewards cards will give the users a chance to earn cash back, travel points, gift cards, and other rewards.
  • Secured credit cards mean that the user had to put down a cash deposit as collateral.
  • Charge cards typically have no spending limit, but users cannot carry over a balance from month to month.

Debit Vs. Credit: Which Is Right For Me?

If you need to establish credit or improve your credit score, one way to do that is through a credit card. Some cards, like a secured credit card, accept people with bad or no credit.

Credit card users can get significant benefits for just using the card for their everyday purchases. They can get cashback, travel points, discounts, and other perks that are only available to credit card users. Users who pay off their balance each month can benefit from using a credit card.

Debit card users can sometimes get access to the same reward programs, but you have to search out a card that does. However, you can worry less about how your debit card spending will affect your credit score. If you have a spending problem, it can help curb your spending because you can only spend what you have access to in your account. Credit cardholders, on the other hand, can make purchases, even if they don’t have available funds at the time of the purchase.

Ultimately, whether you choose debit or credit depends on your spending habits and if you want to earn rewards. You might find that using a mixture of both can help you build a strong credit history while keeping your levels of debt down.

MoneyLion has entered into a compensation arrangement with Benzinga under which MoneyLion pays a fee for marketing and advertising services. MoneyLion does not have editorial control over the content of this material.

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Posted In: EducationPersonal FinanceGeneral
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