“Credit or Debit?” is the question every overworked cashier asks as they scan what seems like an endless amount of cargo pants. But the problem is, you don’t know the difference. You look down at the red piece of plastic your dad handed you to splurge on and extend it without answering. This might be a frequent occurrence among teens who don’t realize what using a credit or debit card means. The difference might be more significant than you think. 

Credit and debit cards are standard financial tools used in daily transactions, but they operate in distinct ways, each with unique features and implications. Understanding these differences is essential for making informed financial decisions and managing your finances effectively.

A debit card is a form of payment that directly takes money from your checking account, which is the account that contains the actual cash you have received/earned. Unlike a credit card, the amount of money is determined by what you have.

A credit card is a method of payment issued by a financial institution that allows the cardholder to pay for items, but there is a limit. The whole idea behind a credit card is that you are short-term borrowing money from the institution and produce a statement at the end of the month. 

According to the Credit Union, a credit statement includes the following: 

• Summary of account activity 
• Payment information 
• Late/Minimum payment due
• Transactions in that cycle 
• Changes in Interest 

With the accumulation of all your charges over the past month, there is no doubt that it would lead to a hefty sum; this is when something called interest comes in. You can pay in full to avoid accumulating interest or you can pay the minimum amount, and then an interest charge would be applied, a form of borrowing. Interest is typically expressed as an annual percentage rate or APR. Various factors contribute to how much interest one pays, such as creditworthiness, loan length and nature. 

Every credit card comes with a predetermined credit limit, the maximum amount you can spend using the card. It’s crucial to stay within this limit to avoid over-limit fees and potential negative impacts on your credit score. Debit cards, however, are limited to whatever amount you have in your account. 

Unlike a debit card, credit cards contribute to your credit score, a three-digit number that tells companies how risky it is to lend you money based on your credit behavior. Factors such as length of loans, how much credit you’re spending and bill-paying history affect your credit score. According to the CFPB, “Companies use credit scores to make decisions on whether to offer you a mortgage, credit card, auto loan, and other credit products, as well as for tenant screening and insurance.” 

With all these talks about credit scores and debt, some might think the solution would be not even using a credit card. But to build a good credit score, you still have to use your credit card for regular expenses and pay it off regularly to avoid high-interest rates and debt. Various rewards come with using credit cards, such as miles, cash back or points. 

While credit cards offer a line of credit and can help build a credit history, which can help with significant purchases such as buying a house, debit cards directly link your bank account and limit spending to available funds. Choose the card that aligns with your financial goals and spending habits to manage your finances effectively.