Credit Cards vs. Debit Cards
What is a credit card?
Credit cards allow you to buy goods and services, transfer balances, and get cash advances. Credit cards allow the user to borrow money from the bank to complete these transactions, based on the agreement that this borrowed money will be paid back at a later date.
What is a debit card?
A debit card allows you to pay for goods and services, however the money comes straight from your checking account. There is no borrowing or lending money involved, instead the money comes from the money you have saved in your bank account.
What is the difference between credit and debit?
The main difference between credit and debit cards is that one allows you to purchase goods based on borrowed money, typically from a bank. And the other allows you to purchase goods based on money you have deposited at the bank.
Credit cards have credit lines, which determine the limit of how much money the person can borrow. If a person has a good credit history, meaning they pay their credit debt back diligently, then the limit of how much money they can borrow increases. However, poor credit history can result in less money available for the user to spend. Once the user reaches the maximum amount of money they can borrow, the card will decline. The user will then have to pay the borrowed money back within a time limit, usually 30 days. If you don’t finish paying before the time limit, interest could be added to the amount you owe and your credit history could be negatively impacted.
A debit card doesn’t have any limit on how much money a person can spend, other than the amount of money in your checking account. Once you use all the money in your checking account, your card will not be able to pay for goods. This also means they don’t have to pay any money at a later time.
There are pros and cons to both credit cards and debit cards. Credit cards are practically debt machines, it is important to understand when you are overspending since credit cards do not just give us money, we just are provided with a little more time to pay that money back. It is crucial to create a limit to the amount of money you are spending since you will have to pay all the money back at a later date. Debit cards take money straight out of your savings, which is a pro and a con. The pro is that you will not have to pay money back at a later time, which makes you more conscientious of how you are using your money and how much. However, if you turn a blind eye to how much you spend that could hurt you immensely, as you are directly deducting money from your savings. Another con of debit cards is that if your card is stolen, it is harder to recover the stolen money, since it is directly correlated with your checking account. On the other hand, if your credit card is stolen it gives you less liability as you are paying for goods on borrowed money.
For teenagers and young adults who are earning some sort of income or have money in their checking account, a debit card might be a smarter choice. Since it does not provide you with money that is not directly deposited in your bank account, it helps prevent overspending and accumulating too much credit. It can help teach saving and spending money only on essentials which are key traits needed once you are financially independent. It is crucial to remember to not overspend and stay within your budget. This can be done through creating a spreadsheet of your income/balance in your checking account and every single purchase you plan on making. This will hold you accountable for your finances and help you make smarter financial decisions!
Interesting Statistics:
The average credit card debt of U.S. families is $6,270.
1.06 billion credit cards in use in the United States of America
America has a credit debt of $787 billion as of 2021
46% of Americans use debit cards to buy goods and services
