Financial Tips | Debt Management

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10/23/07

Comparing Credit Cards and Debit Cards

Debit cards are cards that draw against your checking account. Basically, when you make a purchase with your debit card, the purchase price is deducted from a pool of money that you already have on deposit with your bank. If you spend more than you have on deposit, you are likely to pay overdraft fees and whatever other fees your bank is allowed to charge based upon your debit card agreement.

Some of you may have used your debit card as a credit card at the gas station and/or grocery store. In other words, you may have pushed the “credit” button on the payment machines available at these locations. You did not have to enter your pin and you had to sign a receipt or enter your zip code. Even though the transaction was executed and approved like a typical credit transaction, your debit card purchase is not reflected on your credit report and the purchase prices is debited from your checking account within a business day or two. Therefore, although transacted like a credit transaction, it is not in fact a credit transaction when you use your debit card. You do not get any credit report benefits and such transactions and subsequent debiting on your checking account does not affect your credit score.

Credit cards, on the other hand, are not secured by a checking account (there are some credit cards that are secured by a deposit and are known as “secured” credit cards; however, these cards have the affect of a credit card transaction although they work very similarly to a debit card). Most unsecured credit cards have a credit limit. This limit is the most amount of money you can “borrow” to make purchases. Absent a cash advance, you do not actually get the cash in hand. However, you do get make purchases against this credit limit.

Your charges are accumulated during a set billing period and (unlike a debit card where the entire purchase price is taken out of your checking account), only a portion of that amount becomes due and payable at the end of that billing period. If you do not pay back all the money you “borrowed” to make your purchases, the balance is charged an interest rate. This interest charge increases your outstanding balance. Timely and untimely payments are recorded on your credit report and affect your credit score accordingly.

The differences are many. However, if you know how to use these cards effectively, you will be able to build a great credit score without getting into any debt management problems.

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