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Credit vs. Debit

No one can grow a money tree for you, but you already have the seeds to plant your own.

The biggest secret of the ultrawealthy is that many of their fancy toys—cars, boats, houses—probably weren’t bought with their own money, at least not at first. With proper money management, anyone can finance their way to the lifestyle they want.

The key to accessing that good dough (at a low interest-rate) is pretty simple: have good credit. Now, talk of debit vs. credit might sound a little confusing at first, but it’s relatively easy once you understand the basics.

First thing’s first: what’s the difference between a debit and a credit card? Well, both are little pieces of plastic that live inside your wallet and can be used in place of Benjamins, but the similarities roughly end there.

Debit cards act like cash. When you swipe your debit card, your own money is transferred instantly from your bank account to the seller. No debt is involved. Debit cards are useful for getting money out of ATMs and they typically don’t have fees added for regular use.

Because debit cards use the money you already have, it’s important not to charge more than you have in the bank. If you do, your card may be declined or you may be charged an overdraft fee, a penalty for using more than you own.

Credit cards are based on a different principle: you’re paying with the bank’s money. This is how the wealthy appear even wealthier. Buying on credit allows you to make purchases now and pay them off when you’re ready. At the end of each month, you can pay either the total amount or minimum amount required on the account to avoid late fees. Credit cards often come with perks, like cash back or freebies (helloo Amazon Prime Student!).

An important facet of financial freedom is having a good credit score. A credit score is essentially a measure of trust, and paying your credit card bill on time is one way to build it. Banks, insurance companies, and landlords want to know if you’ve made good financial choices in the past and paid back owed money on time. Does the car dealership trust you to pay back the loan on that Ferrari? Your credit score will give them a good idea.

This fancy little number increases as you build good credit or decreases if you miss out on payments. Having a high credit score opens a lot of doors, from getting a better house loan to landing a job. Debit cards don’t affect your credit score, but using a credit card wisely can help you build it.

Beyond building a credit score, credit cards typically have more built-in security than debit cards. Unauthorized purchases or fraudulent charges on your card are covered by credit card companies and typically reimbursed much faster than debit cards. Credit cards often come with insurance on purchases and may even insure your cell phone.  They’re also great for emergencies. Next time you get a flat tire on your new car, you can charge the towing fee to your credit card and pay it off later.

Because credit involves money that is not your own, it’s important to use credit cards responsibly. This means only charging what you can afford to pay back and being mindful of taking on debt. As rapper Kendrick Lamar sings, “Money trees is the perfect place for shade.” In order to grow your tree, however, you must regularly water the roots.

Do your best to pay off your credit card bill as quickly as possible so the interest doesn’t add up over time.

Choosing when to use a debit or credit card is up to you. Many people prefer to use credit cards when traveling to earn rewards and to maintain the extra layer of security against fraud. Credit cards can also be useful for bigger purchases that you can’t pay off in full right away. Debit cards are handy for any situation in which you would normally pay cash or for purchases where you don’t want to receive a bill. Finding a system that matches your comfort level while also building your credit score is the best way to go.

Legendary investor Warren Buffet echoed Lamar’s sentiments when he said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” In other words, developing responsible money habits like building good credit can have large returns in the long run.

Both debit and credit cards are useful to own, and most people have both. It’s great to get financially savvy early on so that you can plant your own money tree and benefit for years to come.

At Deserve, we’re here to help you invest in your independence and manage your money wisely. Be sure to visit our Credit Education learning platform to get into the nitty gritty of financial independence.