Credit vs. Debt—What Is The Difference?
Updated · Oct 31, 2022
Credit vs. debt are often used interchangeably, but they refer to two slightly different concepts.
Simply put, credit is the ability to borrow money, while debt is the amount you owe.
They are the before and after of the same process and are equally important to your financial well-being.
Read on to learn more about each one and how to use them to your advantage.
What Is Credit?
Credit is a system of financial exchange that allows individuals and businesses to borrow money from lenders and then repay the debt over time.
You can use it to finance big purchases, consolidate debt, or cover unexpected expenses.
We discuss the meaning of credit in more detail in our complete guide on credit.
For now, it suffices to know what are the main types of credit.
Revolving accounts, e.g., credit cards, allows you to borrow money repeatedly up to a certain limit.
Installment credit, such as auto loans or mortgages, is a fixed sum you repay in monthly installments over a set period.
For either type, establishing and maintaining a good credit history is essential. It can help you get better terms on a loan or a line of credit.
What Is Debt?
Simply put, debt is money that you owe to someone. This can be either a loan from a financial institution or from a friend or family member.
Typically, you pay it back with interest.
Here comes the main difference between debt and credit.
Buying something on credit could be beneficial to your credit score. Yet, having debt generally lowers it.
In other words, lenders don’t want you to have a lot of debt. Still, they would like to see that you can manage it wisely.
So, if you don’t carry a huge amount of debt and make your payments on time, you’ll have a good credit score.
Debt vs. Debit
When looking up “credit vs. debt,” people often mean “debit.” So, let’s make sure we know the difference between debt and debit.
Put simply, debt is money that you borrowed from someone. Debit, on the other hand, is money that is in your own account.
So, debt has to be repaid, and debit doesn’t.
How to Use Credit and Debt to Your Benefit
Credit and debt can be beneficial if used correctly.
We already discussed the difference between debt and credit when it comes to your credit score.
Let’s see how you can use them to build a positive credit history and reach your financial goals.
- Make your payments on time. This will help you avoid late fees and will boost your credit score.
- Create a budget and stick to it. This will help you stay on top of your payments and avoid overspending.
- Keep your credit utilization rate low. This means using only up to 30% of your available credit. This applies to lines of credit, like a credit card.
- Pay off your debt before opening new credit. This will show lenders you can manage debt responsibly.
So, credit vs. debt—let’s recap what we’ve learned.
Debt is money that you owe to someone—a person or a financial institution. Credit is the ability to borrow money.
Credit can help you buy the house of your dreams or cover unexpected expenses. However, the second you take on credit, it turns into debt.
And if you don’t manage your debt correctly, it can hurt your credit score and impact your ability to borrow money in the future.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.