Debit Balance Vs. Credit Balance

Whenever an individual makes a purchase with a debit card, she has the option to run the card as either debit or credit. This option, however, does not mean that the balance she carries on her debit account is interchangeable with her credit balance. A high debit balance is financially beneficial to a consumer while a high credit balance can result in high fees and credit damage.

Facts

The available balance on a debit card is directly connected to the card holder's checking account balance. Thus, he must limit himself to spending no more on his debit card than he currently has available in the corresponding bank account. A credit card balance is not tied to a checking account. Rather, an individual may spend as much as he wishes up to a preset limit, known as his "spending limit," dictated by his credit card company.

Features

An individual's debit card balance does not directly affect her credit score. Even if the individual spends more on her debit card than she currently has available in her checking account, paying any resulting fees prevents the debt from being reported to the credit bureaus and damaging her score. Credit card balances, however, are automatically reported to the credit bureaus and directly affect the consumer's credit score. The higher the percentage of debt the card holder incurs in relation to her spending limit, the more damage she does to her credit rating.

Significance

When using a debit card, an individual is spending his own money. Although his bank may charge him a monthly fee for the convenience of using the card, interest charges are not levied against the amount available in the consumer's checking account. An individual's credit card balance, however, is money that he borrows from the credit card company and repays over time. He must pay monthly interest charges on his credit balance to the credit card provider for the privilege of carrying a balance on the card.

Considerations

An individual may deposit as much money as she wishes into her checking account. Thus, carrying a high debit balance is a positive thing and comes with no penalties. Credit card companies, however, impose a limit on card holders. If a consumer's credit card balance passes the spending limit set by her credit card provider, she incurs additional fees. In addition, an individual may pull cash directly from her checking account balance with her debit card without a penalty. If she pulls cash from her credit card balance, she must often pay a higher than normal interest rate on the amount borrowed.

Warning

Mismanagement of a debit account balance and a credit balance can both result in credit damage. Should a consumer withdraw more money with his debit card than he currently has in his checking account, his bank is likely to charge an overdraft fee each time the account balance falls further into the negative. Leaving these charges unpaid will result in the account being sent to a collection agency and a collection account appearing on the individual's credit report--which damages his credit score. Credit balances that are left unpaid for any period of time result in late payment notations on the consumer's credit report. According to the U.S. Department of Commerce, payment history accounts for the largest percentage of an individual's credit score. Thus, late payments to a creditor cause severe credit damage. A consumer who continues to ignore the debt can expect to have his account charged off by the credit card company and transferred to a collection agency.