What College Students Should Know About Debit Cards vs. Credit Cards

Debit cards and credit cards are both types of purchase cards that are alike in many ways but differ in one key respect: Debit cards let you draw money from your own checking account, while credit cards let you temporarily borrow money from a lender, up to a limit. 

With a debit card, you can only spend as much as you have in your account, the way you would with cash in your wallet. A credit card comes with a limit — called your credit limit — which is the maximum amount a lender allows you to borrow. 

What is a credit card? 

Banks and other financial institutions issue credit cards to people. To get a credit card, you usually have to go through an approval process, which involves the lender asking about your income and your experience using credit (if you have any). Lenders need to see if you are a responsible borrower and set your credit limit.

When you use a credit card, you typically have a month to pay back the amount borrowed. If you pay it back in full, you don’t pay interest. (Credit cards charge an annual percentage rate, or APR). But if you are unable to pay the full amount, known as “carrying a balance,” you pay a smaller amount called the minimum, and accrue interest on the balance. 

Using a credit card responsibly allows you to build a credit score and establish a credit history.  Good credit matters because it can help you get approved for things like an apartment or a car loan or lower your utility deposit. Down the road, good credit can save you money on financial products. 

Types of Credit Cards 

There are many types of credit cards. Lenders may offer cards geared toward certain types of customers, like college students starting out or established cardholders who want rewards. Here are some common types of credit cards: 

• Rewards cards: These credit cards offer cash or points rewards to consumers for qualifying purchases. The types of purchases may include travel, groceries, gas or even a rotating set of categories. Some rewards cards offer extra perks like travel insurance coverage, a travel concierge or access to special events. These cards typically carry a high annual fee.

• Balance transfer cards: These credit cards carry a low or 0% interest rate for a specific period, allowing you to transfer an existing balance onto the card to pay off over time. After the offer period ends, you will be charged a regular interest rate.

• Secured cards: Credit cards are typically unsecured, meaning you don’t have to put down a deposit to get one. However, if you are new to credit, you may be required to pay a deposit to get a secured card, which you get back if the lender closes the account or you graduate to an unsecured card. 

• Starter or student credit cards: This is the broader category under which secured cards fall. In recent years, many financial technology companies have started offering starter credit cards for those new to credit, without a security deposit.  

What is a debit card? 

A debit card is a convenient way to access money from your checking account and pay for purchases. You can also use it to get cash out of your account via an ATM. Debit cards do not require experience with credit; they are typically included with your checking account.

Types of Debit Cards

There are two main types of debit cards: bank debit cards and prepaid debit cards. 

• Bank debit cards: Your financial institution commonly gives you a debit card to make purchases when you open a checking account. You can use the card to pay for things online or in-person or to withdraw cash from an ATM. Debit cards don’t typically carry fees but your checking account may have a monthly service fee. 

• Prepaid cards: Prepaid cards are not exactly debit cards, although they work in a similar way. You can buy a prepaid card online or in a store and load money onto it to make purchases without having a bank account or credit history. Prepaid cards can come with many types of fees and features. The Consumer Financial Protection Bureau recommends paying close attention to prepaid card terms before choosing one.

Pros of Credit Cards

• Helps you build credit: As college students, a credit card can often be the first real financial product you use. Paying your bills on time and not using too much of your credit limit will help you build a credit score to open access to better financial products and terms. Debit cards do not contribute toward your credit history. 

• Purchase protection and warranties: Credit cards offer different types of protection for purchases made using the card, such as if the item is damaged or stolen. They may also offer warranty coverage for an item that is past the manufacturer’s warranty period. 

• Fraud protection: Cardholders are usually not on the hook for money lost due to credit card fraud. By law, the consumer’s liability is limited to $50, but many credit card issuers offer zero liability options too.

• Rewards: Credit cards offer a variety of rewards to match your spending habits. Qualifying for top-notch rewards cards may be tough as you’re starting out. But some credit unions or banks may offer students starter credit cards with rewards for purchases made at the university bookstore or campus businesses, for example. 

Cons of Credit Cards

• May lead to debt: Since credit cards allow you to borrow money immediately and pay it off later with interest, carrying a balance may lead to debt. The average American credit card user carried a balance of $5,474 last fall, according to a report by credit bureau TransUnion, up 13% from 2021. The average interest rate for credit cards in the same period was 18%, according to a report from the Federal Reserve. 

• Requires credit experience: The biggest catch-22 about getting a credit card was the need for credit experience to qualify for one. But there are now banks, credit unions and financial technology companies that offer starter cards to people new to credit.

• Fees: Many credit cards that offer good rewards programs charge annual fees worth hundreds of dollars. They also charge late payment fees.

Pros of Debit Cards

• No debt: Since debit cards work like cash, where you only spend as much as you have, there’s no risk of going into debt, assuming you opt-out of services like overdraft protection.

• No credit experience needed: You don’t need a credit history to get a debit card. 

• Fewer fees: Debit cards don’t carry annual fees or any late payment fees, unlike credit cards. But you may still have to pay some fees via your checking account, for overdrafts or monthly service.

• Fraud protection: Debit cards also offer some fraud protection, but fewer than those associated with credit cards. The law requires immediate reporting of fraud to minimize your liability with debit cards. 

Cons of Debit Cards

• Doesn’t build credit: The biggest drawback of debit cards is that they don’t let you build credit, only use the money you already have.  

• Fewer rewards: Many debit cards don’t provide any rewards to cardholders. Some debit card issuers offer specialized rewards, but they are typically not as extensive as those offered by credit card issuers.

Firstcard is a financial technology company, not a bank. Banking services provided by Lewis & Clark Bank, Member FDIC. The Firstcard Debit Card is issued by Lewis & Clark Bank, Member FDIC, pursuant to a license from Mastercard^®. Cash back is available at select merchants.