Debit cards vs. credit cards: Understanding the differences before making purchases

Kristi Cutts, Staff Writer

Paper or plastic? It’s a question you might hear in the checkout line at the grocery store, but it might also be one you ask yourself when it’s time to pay for a purchase.

The paper, of course, is cold, hard cash – but when we’re talking about plastic, we’re talking about debit or credit cards. Since not everyone knows the differences between the two, we’re dedicating this column to breaking it down so you can make the best choice the next time you pull out the plastic.

The details on debit cards
Let’s start with debit cards. Debit cards are tied to a checking account and use the funds in that account for each transaction. Each time you pay with your debit card, you’re spending the money you already have in your account. The amount of your purchase is deducted from your account, sometimes right away and sometimes a few days later, depending on how the purchase is processed.

Debit cards can also act as a sort of key to your bank account, allowing for you to make a cash withdrawal at an ATM usually without fees if you’re using a machine within your network.

When you pay with a debit card, you’re not likely to incur any associated fees unless you spend more than you have in your account. In this case, you’re likely to incur an overdraft fee, which can range from $0 to $35 per occurrence.

Get clued in on credit cards
Credit cards operate a little bit differently. When you pay with a credit card, you’re not directly spending your own money. Rather, each purchase you make with a credit card is charged against your credit limit, and is covered by the credit issuer. Each month, the credit card company will tally your purchases and send you a bill for what you spent. You’ll have to pay at least a portion back each month, but it’s highly recommended to pay off your credit card balance each month to avoid paying interest.

Interest, simply put, is an additional amount the credit issuer charges you each month in exchange for delaying the repayment of your debt.

Credit cards can be a bit scary for just this reason: if you don’t stay on top of your debt, interest charges can get out of hand, meaning you can wind up paying much more than you actually spent on purchases. Credit cards can come with fees. Some common ones include annual fees, foreign transaction fees, balance transfer fees, cash transfer fees, late payment fees or returned payment fees. But using credit cards can also be a very good thing!

When you pay your credit card bill each month, you’re building and establishing your credit, which can earn you all sorts of benefits in the long run. Having a strong credit history can prove to lenders that you’re a safe bet, and that can net you things like higher credit limits or more favorable interest rates. Plus, many credit cards offer rewards programs where you can earn points for cash back, gift cards and more.

Note: Financial Corner is a direct response to student requests for more information on navigating money matters. The tips are provided by Kristi Cutts, branch manager of UW Credit Union’s UW Oshkosh branch.