If you believe that making purchases with a debit card is helping you to build credit – guess again! Unfortunately, many individuals who are just starting out in the world are clueless when it comes to the difference between a credit card and a debit card. Although each have their own benefits, only one of them will help you to boost your FICO score and head down the path to financial freedom.
So what is the difference between a credit card and a debit card, and which should you be using? Here we will take a closer look at the benefits and drawback of each card and how you should be going about building up your credit score.
What’s the difference between a credit card and a debit card?
When all is said and done, a debit card is little more than a plastic check. When you have a debit card, you are only able to spend that money which you actually have. Each time you swipe your card to make a purchase, the funds are pulled directly out of your bank account to cover the transaction. Unfortunately, because you are not borrowing money against the bank, your financial institution will have no need to report your usage of a debit card to the credit bureaus unless you incur overdraft fees which you do not pay back. This is important to remember: the majority of banks will require you to pay a fee if you make the mistake of spending more money than what is in your account.
Should you close the account without paying these fees, you may find that it shows up on your credit report. So although a debit card will not help to improve your credit, it can be a detriment if you do not use it responsibly. When you are smart with your debit card, on the other hand, you can enjoy convenient payments and interest- free purchases. Even if you also carry a credit card, it’s smart to keep your debit card for easy access to your bank account, or for use in the event that credit is not accepted somewhere.
Credit cards are a type of loan that gives its users the ability to “borrow” the money that they spend from a lender (banks and other creditors). All purchases that are made must be paid back to the lender in a timely manner, with minimum payments made each month or quarter, depending on the lender.
The advantage of a credit card is that it allows you to build up your credit, as timely and sufficient payments are reported to the credit bureaus. Many creditors will also offer rewards programs that offer “cash back” or frequent flyer miles, etc. on a specified percentage of the money that you charge each quarter. Lastly, you will enjoy the ability to make larger purchases as your creditor will “front” you the money so that you do not have to pay the entire sum at once.
How can I build credit with a credit card?
In order to obtain a credit card, you must apply with the lender of your choice. It is important to shop around for a creditor, as they will all offer different incentives. Be sure to also check for hidden fees like annual charges that could be extremely hefty. If you have poor credit, you may find that the line of credit offered to you is not very high, but as you continue to prove yourself by making regular and timely payments, more credit will be extended to you and your FICO score will go up as well.
Remember to never overextend yourself when using a credit card. Just because you have been approved for $2000 doesn’t mean that you should charge that much unless you have the funds to pay it back. Making only the minimum payment on your spending will help your score, as your credit report is largely based on your debt-to income ratio. In other words, larger payments are ideal as they will keep your debt down, and boost your score.
By playing it smart with your credit and debit cards, you’ll be able to build your credit in no time.