What’s the Huge Surprise Difference Between a Credit Card and a Debit Card?
They look about the same — why should I care?
Credit card
Using a credit card is taking a loan.
It allows the holder to borrow money for a short period of time at a fixed rate of interest. Interest is the cost of your borrowing.
A credit card is protected from any purchase over $50, so losing your card wouldn’t destroy your financial life.
Pro: Using a credit card can gradually build a credit rating, something each of us will need as we grow and prosper through our career.
Con: People can abuse their credit by charging so much that they can’t pay it off right away.
Once you owe a large amount, you will spend hundreds of dollars every month just to repay your debt.
Failure to repay on time will cost you extra money in interest on the loan.
Continued failure to pay can result in a bad credit rating, which will cost you much more until you improve your credit rating.
Debit card
A debit card is an easy way t0 spend money from your checking account. When you use it for a purchase, that money is instantly taken from your account.
Pro: A debit card makes daily financial transactions easier, while remaining safe.
Con: A debit card has no protection like a credit card. If your card is lost or stolen, all of the money in your checking account could be stolen quickly, and your bank [or credit union] is not responsible for your lost money.*
- Most institutions that issue checking accounts provide limits on debit card losses.
Credit Rating
When people need to borrow money, the cost of borrowing — the rate of interest — is determined by their credit rating. Example: Buying a used car:
* a credit rating of 550 might cost the borrower 25%;
* a credit rating of 700 might cost just 12%.
What Should I Do?
Most people should do both:
* Apply for a credit card and use it regularly to build your credit;
* Open a checking account, which will come with a debit card.
Most important of all: Always get a credit card and use it monthly.
The fastest way to build a high credit rating:
- Use your credit card every month for small amounts — small enough that you can pay it off every month.
- Pay it off every month!
This habit will lead you to build a high credit rating, and that will save you money throughout your life.
