Fool’s School Debit Cards vs. Credit Cards

Those plastic cards that we carry in our wallets may all look alike, but they can be quite different. It’s good to understand the difference between a credit card and a debit card in order to make smarter financial decisions. A credit card lets you purchase things by drawing on a line of credit. You’re expected to pay off what you owe when you get your monthly statement, and if you don’t do so, you’ll be charged interest for the loan you have essentially taken out. In contrast, with a debit card, you’re drawing funds directly from your bank account, with no lending involved. Thus, using a debit card is a lot like paying with cash or writing a check. A credit card lets you spend more than you can afford and rack up debt, while a debit card can keep your spending within your means. Credit cards can be sneaky, too. If yours means featuresthat one a late “penalty payment APR,” might that result in your interest rate being hiked to 25 percent or 30 percent. Choose cards with no penalty APRs. While debit cards dock your bank account immediately, credit cards feature a grace period of a few weeks, typically, before interest charges start accruing. Debit cards typically feature fewer fees than credit cards, but if you charge more than you have in your account, you’ll pay for that transgression. Despite their significant dangers, credit too, cards especiallyoffer someif you’regreat benefits, disciplined. For example, there are cashback and rewards cards with which you can earn up to 5 percent or more on your spending, which can amount to several hundred dollars per year. Many cards offer other perks, too, such as warranty protections on purchases, and credit cards generally have more anti-fraud protections. Credit cards can also help you build a strong credit history and solid credit score, which can lead to better rates when you want to buy a home or car. Learn more at consumer.ftc.gov.