Debit Card vs Credit Card: The Smarter Choice for Young Adults

The decisions young adults make concerning debit card vs credit card usage have a profound effect on their financial well-being. Using a credit card to pay for essential and non-essential purchases can provide benefits such as increasing credit scores. By that same token, maxing out a credit card’s limit and falling behind on payments can prove disastrous. That’s why young people with their first credit card sometimes need to tread lightly and rely more on the resources connected to a debit card. If you are a young adult who wants to learn more about responsible debit card vs credit card use, these are four ways to make smarter choices.

1. How Debit Cards Work for Teens

Debit cards are directly linked to checking accounts, giving users immediate access to their money. They are a type of pay-as-you-go system that helps credit union members manage their finances without incurring debt or interest.

A relatively straightforward process, debit cards pull money from your checking account to pay for goods and services when you swipe the plastic or make an online purchase. If you are connected to online banking, you can see the purchase post almost in real time. Your checking account balance drops in equal proportion to the money spent. Debit card users can also withdraw cash at ATMs and link them to ongoing auto payments. They are a risk-free opportunity to make daily purchases without dealing with a monthly payment.

2. What Young Adults Need to Know About Credit Cards

Although credit cards appear to work just like debit cards when making purchases, significant differences exist. Instead of withdrawing your own money from an account, credit cards typically have borrowing limits. Users borrow up to a certain amount with the understanding the funds will be paid back with interest. Savvy credit card holders often pay off the full monthly amount to avoid interest from accumulating.

Members of Gen Z carry nearly $3,000 in credit card debt on average. High-interest cards with fees can siphon off a substantial amount of a young person’s income. When credit card debt builds up, the amount can negatively impact FICO scores due to imbalanced debt-to-income ratios. For cardholders who make late payments or cannot afford the monthly minimum, blemishes appear on their credit histories. Those are just some of the reasons it’s crucial for young adults to understand the key debit card vs credit card differences.

3. Comparing the Financial Benefits

It’s essential not to think about debit card vs credit card usage only as a convenience. Instead, look at them as a tool to build financial stability and a repayment history lenders trust. These rank among the top benefits associated with debit and credit cards.

• Budgeting Benefits: Debit cards deduct the amount of a purchase from your checking account balance, almost immediately. Should your balance become depleted, debit cards generally do not allow cardholders to become overdrawn. You will not run over budget with debit cards and can track spending on a purchase-by-purchase basis.
• Credit Scores: Although debit cards typically prevent users from getting overdrawn, they do not help you improve your FICO score. Because credit cards operate with borrowed resources, their usage and repayment have a direct impact on your credit score. Young adults often need to improve their credit scores to gain access to low-interest loans and mortgages. That’s why they are a strategic borrowing option when managed responsibly. Credit unions offer low-interest credit cards and no-fee credit cards when handled properly.

When selecting a debit or card, be sure to review the interest rate, fees, and cost of penalties. These elements can take a bit out of your budget.

4. Developing Healthy Spending Habits

Credit union members do not need to engage in a debit card vs credit card debate. Both products can be part of a robust financial portfolio that buoys FICO scores through healthy spending habits. There are times when it makes perfect sense to use a credit card and pay off the balance at the end of the month. At other times, debit cards help regulate spending and prevent interest from accruing on borrowed money. These are healthy spending habits for young adults to consider practicing.  

• Create a monthly budget and stick to it.
• Do not use credit cards or debit cards to make impulse purchases.
• Maintain a credit card balance you can pay off each month.
• Track your spending by installing digital banking apps.
• Review monthly statements for erroneous purchases.

When opening a checking account, the best institutions offer perks such as free debit cards and checks. Credit card perks may include free balance transfers and no interest during the first six months. When weighing debit card vs credit card products, get the best bang for your buck and achieve long-term financial goals.

MPCU’s Debit and Credit Card Solutions

At Members Plus Credit Union, we offer debit and credit cards tailored to the varying needs of young adults. We provide low rates, rewards, and perks designed to help students. We work diligently with our valued members to provide credit and debit cards that serve their needs. If you would like more information, contact us today and let’s get the process started.