Debit card vs. Credit card: Which one is better for your credit score?
Posted: Nov 27, 2013
Ever go to purchase something at the store, swipe your bank card and the little screen pad asks credit or debit? Sure you have. Anyone who has ever used a bank card will have received that same question. In fact, if you always use the card as debit, you probably will not switch it credit, and vice versa. But, what are you really doing? Does anyone know the difference between a credit card and debit card? Do you know why you would use one over the other, or how they may affect your credit? Read further to find out the difference between these cards and how they might affect your credit.
Everyone knows what a debit card is, right? They look like credit cards and are issued by your bank. The only difference from a credit card is that you are taking money directly from your personal checking account rather than from credit extended to you. In essence, it is a plastic checkbook and much faster to process, often immediately. Debit cards give you direct access to your bank account without having to carry around cash and checks. When you purchase an item from the store you are given the option to enter your PIN number or sign. With a debit card, entering your PIN number offers a slightly more secure way to use the card. You likely won’t have to show your ID, but knowing your own PIN number is a good indicator of you are who you are.
Credit cards are surrounded by a whole bunch of information and reviews on whether they are good or bad for you. First off, if used correctly, they may be a great thing for you, by simply proving a bank is willing to give you an unsecured line of credit. Used wrongly and abused, credit cards might really hurt you.
There are two types of credit cards, secured and unsecured. A secured credit card is a credit card backed with your own money that is deposited into the bank’s savings account, often a non-interest bearing account. An unsecured credit card is a credit line issued to you by a bank. The credit card company agrees to pay a vendor, and you agree to pay the credit card company. A credit card acts as a small loan for every purchase you make with the card.
Credit vs. Debit
Now that you know what each is, let’s look at debit cards vs. credit cards. Except where the money comes from, you still may not know the differences between the two. Let’s look at security. Those things that make your debit card easier to use, also make fraud easier. If you have a debit card that is stolen, the money comes directly from your bank account. Theft of a debit card can literally hit your pocket book, and can hit it hard. Credit cards are held to liability laws. For instance, if you notice fraud on your credit card bill and report it immediately, you only have to pay $50 of whatever the purchase was. The liability grows over time, but you do have a sense of protection. Also, credit card companies are required to investigate fraud on your behalf.
In addition to better protection, credit cards will also help to improve your credit score over time.
How they affect your Credit Score
It’s important to learn how credit cards affect your credit score. They can do so in two ways. First, lenders want to see other lenders extending lines of credit to you. If one lender trusts you, then others will. Second, with proper use of a credit card you may see your credit score grow. It is important to limit the amount of your credit cards usage to 10%-30%, however. This will show lenders you know how to use your credit wisely. In addition, consistent payments will improve your score over time.
It is important to regularly get your credit reports and scores. The recommendation is yearly, but to monitor your credit score, it is important to review your credit score at least monthly.
Remember, to improve your credit score and avoid debit card fraud pull out that credit card and don’t be afraid to use it. Just be wise about it!