Credit or Debit: What's the Difference?

Credit or debit? If you're still unsure when you're supposed to reach for which, you're not alone. But, while they may seem similar at first glance, they each have their advantages and drawbacks. Understanding the difference between credit and debit, and knowing when to use each, is the first step to making informed financial decisions and successfully managing your money.

There are many credit card advantages — they are great for when you need to make a large purchase, want to earn rewards, or want enhanced fraud security. However, they carry the risk of overspending and incurring interest charges if not managed responsibly.

Debit offers simplicity and accountability. It ensures you only spend what you have and can be an excellent choice for day-to-day expenses. It's especially useful for those who want to avoid debt or curb impulse spending.

Let's do a deep dive into the two:

Credit: Borrowing Money

Essentially, using credit is an agreement with a financial institution that allows you to borrow money with the promise to repay it later—often with interest.

Four things to remember about credit:

1. Interest Charges. Using credit comes with a cost — interest. The interest rate depends on a few factors — including credit score, the type of credit, and prevailing market conditions. Failure to repay the borrowed amount on time can result in substantial interest charges. Always look for one with a lower interest rate, especially if you don't plan on paying off your balance each month.

2. Credit Score. Your use of credit, including how responsibly you manage it, will significantly impact your credit score. A higher score typically comes from responsible credit management and can lead to better terms on future loans. Conversely, a poor credit score can affect your probability of securing a loan in the future — such as for a car or a mortgage.

3. Fraud Security. Most credit cards come with a guarantee of $0 fraud liability. This can make credit charges generally the better choice when it comes to online shopping or travel.

4. Rewards. One of the reasons people love to use credit is for the rewards. Many cards let you earn rewards on everyday spending. These can include cashback, to points you can spend on travel.

Debit: Spending Your Own Money

Debit, on the other hand, involves using your own money—when you use a debit card or write a check, you're spending funds that are already in your bank account.

Four things to know about debit:

1. Immediate Access. Debit transactions deduct money directly from your bank account at the time of the purchase. This means you can only spend what you have in your account.

2. No Interest. Unlike credit, there's no interest to worry about when using debit because you're not borrowing money.

3. Budgeting Aid. Debit cards can be helpful for budgeting since you're limited to spending only what's in your account. It's a handy tool to prevent overspending. Since debit doesn't involve revolving debt, you won't find yourself carrying a balance or racking up debt over time.

4. Credit Score. While debit transactions have no direct impact on your credit score since you're not borrowing money or repaying debt, some banks report delinquent accounts, which could impact their ability to get accounts at other banks.

Ultimately, deciding whether to use credit or debit depends on your financial goals and spending habits. There's no right answer in determining what works best for you, but hopefully being armed with knowing the ins and outs of each will help you make a good decision on when to reach for credit or debit. If you have more questions about either, or anything other burning finance question, a Personal Banker from FNBO would be happy to answer them. Give us a call today!