Debit and credit cards are used worldwide and they look alike, but they have major differences. A debit card takes funds directly from your bank account, while a credit card is linked to a credit line that you can pay back later. It's important to understand these differences for financial management and decision-making. Discover their interest implications and their impact on your credit history and when one might be better than the other.

Understanding How Debit Cards Function

Banks issue debit cards to their customers so they can make purchases or obtain cash without having to write a paper check or visit a teller at the bank. The card is linked to your checking account or sometimes a savings account.

How to Use a Debit Card

Use debit cards to withdraw cash at automatic teller machines ATMs and make purchases in-store or online. When the card is used in a transaction, the money comes out of the linked account either immediately or after a brief interval. If you don't have enough money in the account to cover the transaction, your card may be rejected.

PIN and Validation Codes

Debit cards have a unique personal identification number (PIN) that you enter at ATMs or point-of-sale terminals. However, with online transactions, you may be asked for the card's validation code located on the back of the card as a security measure.

Debit Card Network

Most debit cards are linked to a network like Visa or Mastercard and can be used wherever accepted. Although most debit cards link to your bank account, offline debit cards are not electronically connected to your account.

Understanding How Credit Cards Function

Credit cards are also issued by banks but require a separate application process. You don't need to open or maintain a bank account with the company to apply.

How to Use a Credit Card

Credit cards aren't linked to a bank account, but they provide a credit line up to a preset limit. Like debit cards, credit cards can be used at ATMs, but cash advances can be costly due to fees and interest.

How Credit Cards Charge Interest

Card issuers charge interest on the money the cardholder borrows, although cardholders can often avoid interest if they pay back their full balance within their card's grace period.

Credit Card Network

Like debit cards, credit cards typically belong to a card network like Visa and Mastercard and can be used anywhere cards in that network are accepted. Private label or store credit cards are an exception since they are only valid at a particular retail chain.

Comparing the Key Differences Between Debit and Credit Cards

Beyond the differences mentioned, debit and credit cards have other distinctions. Among the most important ones:

1. Debit cards won't affect your credit score. Your credit score is a three-digit number reflecting your creditworthiness. Your credit score is based on information supplied to credit bureaus by your various creditors, including any credit card issuers. Consistently paying your credit card bills on time will help your credit score, while missing or late payments will hurt your score. However, debit cards don't report to credit bureaus, so they won't affect your credit score one way or the other.
   
   
2. Debit cards don't charge interest. You won't owe interest on your debit card because you aren't borrowing money. With overdraft protection, if you overspend, the bank covers the excess, but you'll incur fees.
   
   
3. Credit cards often pay rewards. Many credit cards offer rewards like cash back or airline miles on purchases. Some debit cards and checking accounts also pay rewards but tend to be less generous.
   
   
4. Credit cards have better consumer protections. Different laws govern credit and debit cards. Your liability for fraudulent charges with a credit card is typically capped at $50 and sometimes $0. With a debit card, you could (in the worst-case scenario) lose all of the money in your linked accounts.1

Evaluating Credit Cards vs. Debit Cards: Which Is Superior?

Both credit and debit cards can be handy when managing your personal finances, and can be nearly impossible to avoid using them in today's financial world. Some merchants don't accept cash or checks anymore.

Credit cards can be especially useful if you need to make a purchase or face a financial emergency and don't have enough cash available in your checking account. However, credit cards can get you into financial trouble if you don't pay down the balance and interest accrues and compounds, increasing your debt.

Conversely, debit cards can help you stay within your budget and avoid spending money you don't have in your account. Since debit cards don't involve borrowing money, you don't get charged interest. However, it's important to manage your money in your checking account because if you overspend with a debit card, you may not have the funds needed for critical expenses like rent or food.

If you're trying to build or repair your credit history, a credit card used responsibly can help. In fact, some credit cards offer credit builder features, such as student credit cards, starter credit cards, and secured credit cards.

The Bottom Line

Debit and credit cards allow you to make purchases and withdraw cash. However, debit cards are linked to your bank account, limiting the size of your financial transactions by the amount of funds in your bank account. Conversely, credit cards are not linked to your bank account. They offer a credit line for purchases and cash advances. In return, credit card companies charge you interest on the borrowed money, but they can help you build a credit history.

There are consumer protection differences as well. Credit cards generally offer better protection against fraud than debit cards.

Select a card based on your financial goals and needs, whether to manage your budget, build your credit, or gain rewards.

Key Takeaways

You may want to cancel a credit card to cut back on your spending or to stop paying the associated fees. Before you cancel, consider how ditching that credit card could impact your credit score and finances. The steps to safely cancel a credit card are to redeem any available rewards, repay your outstanding balance, get in touch with your card issuer, submit a certified letter, and keep an eye on your credit report afterward.

Understanding the Impact on Your Credit Score

Cancelling a credit card can impact your credit score in a few different ways.

Credit Utilization

Your credit utilization ratio measures how much debt you use compared to your total available credit. Canceling your credit card decreases your available credit. But the amount you owe on other accounts stays the same, so you could drive your utilization up. The amount you owe on credit accounts is 30% of your credit score.1 If your credit utilization rate rises and you use a significant amount of your available credit, your credit score could take a hit.1

Average Age of Accounts

The length of your credit history accounts for 15% of your credit score.1 Typically, a longer history contributes to a better credit score. Your credit history length is calculated using several factors, including the age of your oldest and newest accounts and the average age of all credit accounts.

When you cancel a credit card, this can lower the average age of your accounts. Canceling a credit card that is your oldest account could have an even bigger impact on your score.2

Credit Mix

Your credit mix accounts for 10% of your credit score.1 It takes into account the various types of accounts you have, such as credit cards, mortgages, car loans, or student loans.

Closing a credit card could mean you have a less diverse credit mix, potentially lowering your score.2

Reasons to Consider Canceling Credit Card

While getting rid of a credit card may impact your credit score, there are plenty of possible reasons that cancellation may be the right choice for you.32

• Substantial fees: Some credit cards charge an annual fee. This may be the case with premium travel cards or cards offered to people with poor credit. You may find that paying the fee on a credit card is not worth the perks you receive.
• Spending control: Credit cards can be a useful tool, but they can also lead to a high debt load if not used responsibly. If you are working on building a budget and looking for ways to control your spending, canceling a credit card may be helpful.
• Divorce: If you are going through a separation or a divorce, canceling joint credit cards is a common part of untangling your finances. You will need to decide together to cancel a shared card and how to pay off any outstanding balance.
  

Steps to Safely Cancel a Credit Card

If you've decided that canceling a credit card is the right move, you can take a few different actions to minimize any negative impact.2

• Redeem your rewards: Don't forget to take advantage of any credit card rewards before canceling a card. You may have points that can be used to make purchases or converted to cash. Some cards have airline miles rewards programs and discounts for certain purchases. You may even be able to transfer rewards.
• Pay off your balance: If you decide to cancel a card, you are still responsible for any balance on the account. You could cancel the card before paying what you owe, but you will still need to make payments with interest until it is paid in full.
• Contact the card issuer: When you are ready to cancel, you will need to contact the card issuer. Check your cardholder agreement to see if there are any additional steps you need to take to move forward with cancellation.
• Send a certified letter: Sending a certified written letter is a good follow-up measure to ensure the card issuer receives your request and follows through. You can also request the card issuer to send you written confirmation of the cancellation.
• Monitor your credit reports: Keep an eye on your credit reports following cancellation to ensure it is accurately reported. Your credit report should reflect the closure of the account and the fact that you requested the cancellation. If there is an error, you have the right to dispute it with the credit reporting agencies.
  

Common Myths About Canceling Credit Cards

There are some common misconceptions about the impact of canceling credit cards.

Many people believe that canceling a credit card will boost their credit scores. While you may have a good reason to cancel your card, don't expect it to improve your credit score. Canceling an account can lower the average length of your credit history and increase your credit utilization, both of which can have a negative impact on your score.

While closing a credit card can impact your credit score, it doesn't erase the positive impact of on-time payments made on that card. Closed credit cards remain on your credit reports and impact your score for up to 10 years.

If you cancel a credit card on which you have made on-time payments, that card can still help your credit score for the years it remains on your credit report post-cancellation. On the other hand, if you cancel a card with missed and late payments, it can remain on your credit report for up to seven years and push your credit score down.4

The Bottom Line

You can cancel a credit card or choose not to use it anymore to reduce your credit card debt. An unused credit card can boost your credit score by contributing to your credit history and helping to lower your credit utilization.5 But you may have valid reasons for canceling a credit card.

If you decide to proceed with the cancellation, consider the potential impact on your credit score and take the proper steps to ensure you cancel the card safely.

KEY TAKEAWAYS

Store credit cards may seem like an attractive option with their enticing perks and a minor issue in the big world of credit cards and debt, but these ubiquitous cards are often the cause of major credit trouble. Thanks to exorbitant interest rates and an easy application process, store credit cards can significantly damage unwary consumers’ credit scores.

Nevertheless, it is possible to avoid high charges and lengthy repayments. Here’s what to watch out for when using this often-overlooked form of credit. 

What Is a Store Credit Card?

A store card is simply a credit card that can only be used in a specific store or group. Do not confuse store cards with loyalty cards, which allow you to collect points when you spend in a particular store.

Unlike loyalty cards, store cards allow you to borrow money. If you are not careful, store cards can mean only one thing: high-interest debt. After all, stores are set up to make products appealing to persuade shoppers to buy more. 

Store Credit Cards: Pros and Cons

Store cards are incredibly easy to obtain, and they offer customers deals and discounts. Store credit cards can be handy for customers who shop in that particular store regularly and who can pay back what they owe every month.

However, there are disadvantages to owning a store credit card. Many people with store credit cards end up paying high rates of interest on the purchases they have made. What's more, most big box store cards on the market charge over 25% interest, and some charge nearly 30%.1 These figures reflect high APR amounts, much more than a standard credit card.

Another issue is the illusion of "free money" with a credit card versus cash. “While the interest rates are unnecessarily high, the real problem is the accessibility of store cards. You can sign up for a store card at the checkout and start spending there and then," says James Daley, managing director of Fairer Finance.

Risks of Overextending with Store Credit Cards

A big problem with these cards is that retailers don’t always check your credit rating before issuing your card. Although this sounds great in theory, they’re allowing those who don’t have the available funds to get into debt they cannot afford—without spelling out the consequences.

When you apply for a store card, a search is added to your credit file. If you apply for too many of them in a short time, your credit score will drop significantly, making it harder for you to get future credit.

For some people, this is the only credit card available to them. The store assistants are untrained in financial education and told to sign people up in return for cash incentives. Thus, those without suitable disposable incomes often find themselves spending on these cards without understanding how to manage them and racking up expensive, ill-afforded debts in the process.

The irony of store cards guarantees that shoppers spend their money at a specific shop or chain of shops. Yet, a store card costs more in interest than a regular credit card that you can be used everywhere. Therefore, you should always shop around. Only be loyal to a specific store if the product is the best value. If your credit history isn't great and your credit score needs work, a store credit card can help you build up your credit to be strong enough for a standard credit card. Many stores offer benefits to cardholders, too.

The Impact of Store Credit Cards on Your Credit History

A closed-loop store credit card can only be used in one store or a group of stores. A closed-loop card works like a credit card in the store that issues it. For example, a Macy's card can be used at all Macys, and a Walmart store card can be used at Walmart and Sam's Club stores. These cards can help or hurt your credit history, depending on how you use them. If you use your card every month and then pay off at least the minimum balance, or if possible, the total amount owed, a store card can be a valuable financial tool to build your credit history.

Make sure the store has reported your card to the big three credit bureaus, as well. If you miss a payment or do not pay the minimum amount, it can ding your credit after 30 days. If your credit utilization is too high, it can hurt your credit report. You want to keep your credit utilization below 30% if you're going to improve your credit history and score.2

Deciding When to Open a Store Credit Card

Suppose you have strong credit, responsible spending habits, and your credit utilization isn't too high. In that case, a store card might be helpful if you are making a large purchase or regularly shop at a store that offers excellent rewards for its store card users. If you are trying to improve your credit and don't anticipate having problems paying your balance, a store credit card can also be helpful.

You shouldn't open a store card if you can't afford to pay at least the minimum balance, if you are a compulsive shopper, or if the store credit card's APR is too high. If you are struggling to build your credit, opening a new card will show up on your credit history, and if you use it, it might drive up your credit utilization ratio higher than you want it to be.

Strategies for Maximizing Store Card Benefits

The number one rule is not to go anywhere near store cards unless you are certain that you will pay the balance in full each month. And never be seduced into buying something just for the sake of getting a discount.

If you are confident you can do both of these things, you could consider taking advantage of store card perks. Many store cards offer a discount for signing up, such as 20% off the first time you spend on it. Don’t simply spend it all on a small purchase. Sit tight until there’s something expensive in the store that you need to buy, thus maximizing the discount.

If there are exclusive cardholder events and offers, you can keep the card to secure an invitation. Many store cards have special evenings and offers, a bit like a membership club. There’s nothing wrong with keeping a store card just for this.

Exploring Alternatives to Store Credit Cards

If a store card isn't right for you, there are alternatives to signing up for one. A rewards-based conventional credit card may offer discounts, cash-back, and deals at eligible stores if you qualify.

If you find you frequently shop at big box stores, like Walmart, Costco, or Target, you could sign up for one of their credit cards, which offers store-card type rewards but can be used anywhere Visa or Mastercard (depending on the issuer) is accepted. A simpler alternative to a store card—use cash.

The Bottom Line

Store cards come with high interest rates and limited usability, but they can help you build credit if they're handled carefully. They don't pose a problem if you pay off the balance within the interest-free period. If you do have a balance sitting on a store card, consider switching it to a 0% balance transfer credit card, allowing you to make inroads into the money owed and eliminate interest charges.

Avoid using store cards for borrowing money on a long-term basis, unless the company offers a zero-percent financing deal. Big-box items like furniture and major appliances sometimes come with 0% interest for a period of 24 to 48 months if you use the store card. However, if you do run up store card debt, problems can soon mount. The original discounts and item prices will be small fry compared to the interest payments you could find yourself making.