Credit vs. debit: the benefits and details of both

Entering the world of personal finance can be overwhelming. For example, credit or debit, the most fundamental terms relating to spending, can often be confusing if you don’t know their differences. Whether you’re just starting to think about your money in the long-term or simply need a refresher on best practices, we’ve got a full breakdown of credit vs. debit below. We’ll cover what each means, when to use them, and how to make each work for you.

The Differences Between Credit and Debit

Both methods are used to make purchases without checks or cash, but differ in their source of funds. Credit cards are essentially a line of credit, or loan, from a financial institution at purchase time. They’re paying for whatever product or service you’re buying, and you’re entering an agreement to pay them back within a specified time, often with interest. Instead of remembering a PIN for purchases, credit cards typically only require a signature.

On the other hand, debit cards are taking funds directly from your bank account at the time of purchase. These transactions occur in real-time, and after swiping your card, you’re finished with the purchase process. These purchases are interest-free, but you need to monitor the charges you make to ensure you continue to have available funds in your account to cover them.

What’s The Deal With Interest?

Interest payments are the key to deciding whether to use credit or debit. Most credit card companies charge interest on an account if the balance is not paid in full within 30 days. It’s important to know what the interest rate is for each credit card you open. If you’re able to pay your balances quickly, credit can be a great way to increase your spending power. However, be careful about overspending and not being able to pay off your balances in a timely fashion.

Depositing money in interest-bearing savings or checking accounts is the fastest way to put your money to work for you. Instead of paying interest on previous purchases completed with a credit card, using a debit card linked to a checking account could save you money in two ways: you can buy only using what you have available in funds, and money not spent usually will earn interest.

Advantages of Each

Both spending methods have unique advantages that make one more useful than the other in certain situations. Knowing these differences is essential to maintaining financial health, and you should consider them before any purchases.

Credit – Despite potential interest payments, there are several reasons you may want to use a credit card for your purchases. Perhaps the most significant benefit is time. Most purchases won’t have to be paid off for at least 30 days, and that extra window can be enormous in times of emergency. Using credit will also help establish your credit history, increasing your future borrowing power, and opening up new investment opportunities.

Debit – The most significant advantage of using debit accounts is to limit the accumulation of debt. If you’re only spending money that’s already in your account, you aren’t accruing any debt and should maintain better financial independence. While some debt is beneficial to increase your creditworthiness, it’s essential to not spend over your head, and using debit is the easiest way to stay within your limits. Debit accounts can be used to access cash quickly and penalty-free, making them one of the most convenient ways to access your money. Debit cards can be used like credit cards when the user opts to sign for a purchase instead of using their PIN number. Many financial institutions offer rewards checking accounts that provide financial incentives if they do sign.

In conclusion, credit cards are essential in building your credit rating and are invaluable in times of crisis. Debit cards should be your daily go-to, taking funds directly from your bank account to make purchases without accumulating debt. When used properly, the two should work in harmony to help you maximize your spending power and achieve your financial goals.

FINANCES FYI is presented by Evergreen Credit Union, serving all Southern Maine and committed to helping Mainers of all ages better manage their financial lives.