Debit & Credit Cards: Pros & Cons
Last updated January 16, 2024
As a young adult learning about money management, you may be wondering about the differences between debit and credit cards. Both are necessary components of building a strong financial future, so it's important to know how each work, as well as their pros and cons. We break down what you need to know!
What is a debit card?
A debit card is a card linked to your checking account that allows you to make in-person and online purchases. When you buy anything with your debit card, the cost of the item is deducted from your checking account. Debit cards are commonly used in place of cash. Many first-time bank account users will opt for a debit card first, because they're usually easier to manage and a bit more low-risk than credit cards.
Debit cards: pros and cons
- Linked directly to your checking account, which can prevent you from overspending, as you're only able to spend the money you have available in your account.
- Requires a pin number that only you know. If someone were to steal your card, they would have a more difficult time being able to use it and access your money.
- Doesn't require you to carry cash, which can be easily lost.
- Transactions require action from your bank and from the seller of your purchase to clear it and update your account. This can be confusing, because until a purchase has cleared, you may still see the funds in your account, and end up accidentally overspending.
- If you spend more money than you have available in your account (when making an online purchase, for example), you can accidentally overdraft. This means you've spent money you technically don't have. When you overdraft, you can be punished by your bank with extra fees.
What is a credit card?
A credit card is similar to a debit card in that it allows you to make in-person and online purchases. However, when you buy something with a credit card, the cost isn’t deducted directly from your checking account. Instead, it’s added to your credit card statement, which you must pay off proactively (usually around once a month) to avoid fees and interest. Credit cards must be applied for. Once you're approved for a credit card, your credit card company will give you a certain spending limit each month. For example, if your credit card company gives you a spending limit of $2,000 each month, it’s your responsibility to make sure you don’t spend over that amount. You can link your checking account to your credit card to pay the card off each month. If you aren't able to pay off your balance, it will have interest added to it for your next payment.
Using a credit card wisely helps you build credit, a crucial component of your finances. A good credit score can allow you to borrow money with less interest. This is important if you want to lease an apartment with more ease or get a car loan in the future.
Credit cards: pros and cons
- Allows you to borrow money up to your credit card limit. (Your credit card limit will vary based on your credit card company and credit history.)
- Helps you build credit history, so that when you're ready to make a large purchase, you have proof of accountability. Lenders typically offer lower interest rates and better terms to people with a strong credit history.
- Temptation to buy things that you may not have enough money in your checking account to purchase. This means that if you buy something with your credit card and are unable to pay off the balance within a month, interest will begin to accrue on your statement.
- Requires approval from a bank.
- Can easily amass debt if you don't pay the full balance on the card every month.
- Not using it wisely can prevent you from renting an apartment or getting loans for larger purchases.
- Depending on your bank, there may be a high interest rate to pay off purchases.
For more money management tips, be sure to check out the rest of our free money management resources to learn how to be a smart spender and saver! If you have any job or finance-related questions for us, just text #Jobs to 33-55-77 to chat with one of our advisors (if you're on a mobile device, click here to have the text message set up for you)!