The Difference Between Credit & Debt

by Cam Merritt
A credit card lets you pay for things with borrowed money -- and that results in debt.

The difference between credit and debt is essentially a story of "before" and "after." Credit is the ability to borrow money, while debt is the result of borrowing money. When you use credit, you create debt. And the more responsible you are at managing your debt, the more access you may have to credit in the future.

Credit

Credit represents money available to be borrowed. A credit card, for example, allows you to buy things with borrowed money: The card issuer pays for your purchase, and you repay the issuer later when your credit card statement arrives. Another example is a line of credit, an agreement with a bank that allows you to borrow and repay money as needed. When a bank, credit card company or other financial institution sets up a credit account for you, it typically sets a maximum amount you can borrow. That's your credit limit.

Debt

Debt represents money that has been borrowed but not yet been paid back. When you make a $100 purchase with a credit card, for example, you're adding $100 in debt. Make more purchases with the card, and your debt grows. Make a payment, and your debt shrinks. In essence, credit is nothing more than the ability to create debt.

Credit Reports and Scores

Your credit report is a summary of how you have managed credit and debt over the years. Credit reports track not only how much credit you have had available to you but also how much of that credit you used -- that is, how much you turned into debt. Credit reporting bureaus use the information from credit reports to assign consumers credit scores. Lenders use those scores to gauge whether credit applicants are an acceptable risk, meaning they should be able to handle more credit without getting too deep in debt. Too much debt can lower your score, but so can too much available credit just waiting to be used.

Debt vs. Debit

"Debt" shouldn't be confused with the "debit" in debit card. Credit cards create debt; debit cards do not. When you make a purchase with a typical debit card, the card issuer takes money directly out of an account belonging to you. With a prepaid debit card, you make a deposit with the card issuer; then, when you make a purchase, the issuer draws down the deposit. In either case, you're paying for things with your own money rather than borrowing money and repaying it later.

About the Author

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.

Photo Credits

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