What's the difference between credit cards and debit cards? Chances are you have at least one of the two in your wallet. Which is better? Both have their benefits and potential drawbacks, depending on your financial situation, spending habits, and credit history. Learn the basics of credit vs. debit cards below.
What You Need to Know About Credit Cards
Institutions, such as banks, issue credit cards to cardholders after they've applied for and been approved for a line of credit. Cardholders agree to repay the money borrowed with interest. There are four types of credit cards:
- Standard Card — provides a line of credit.
- Rewards Card — offers perks like travel points and cash back.
- Secured Card — can't be used without a cash deposit as collateral.
- Charge Card — doesn't come with a spending limit, but typically doesn't allow unpaid balances to carry over.
Credit card usage also impacts your credit report and credit score. Your credit report provides lenders with a window into your financial history, while your credit score summarizes your creditworthiness. Using credit cards responsibly can significantly raise your credit score and improve your chances of getting approved for personal loans, low auto financing rates, and more. On the other hand, failing to repay your credit card bills can send your credit score into a downward spiral. None of this is true for a debit card.