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Debit And Credit-What Each Means-How Each Might Affect You

Updated on February 4, 2017
cherylone profile image

Budgets and bookkeeping have always come so easy to me. I had planned to be a CPA, but life kind of got in the way.

Can you really tell me what they mean?

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Debit-what does it mean

Debit means: "the recording or an entry of debt in an account". That definition comes from Dictionary.com. Merriam and Webster's site defines Debit as "to enter upon the debit side of an account : charge with a debit". Okay all you financial wiz's out there, we common folk need a real definition right? A definition that tells us how this simple word can wipe out our account in a single transaction. So what does Debit mean in simple terms? A debit means many things to many institutions.

In the banking industry it means something you remove. For example: if you charge an amount on your credit card, the amount will show up as a debit because the bank pays out the amount or debits (-) their resources to pay the amount. You are now in debt for that amount of money to the bank. This increases the amount you owe. However checking accounts work differently. You must have the money in the account to cover the charges you make. So a debit to your account means a withdrawal from your account. This reduces the amount you have to spend.

Debt is defined as "a state of being under obligation to pay or repay someone or something in return for something received" by Mirriam Webster. I think most of us are familiar with debt.

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Did you ever understand the language of your bank?

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What does Credit mean?

Merriam-Webster defines Credit as: "reliance on the truth or reality of something". Dictionary.com defines Credit as: "the ascription or acknowledgment of something as due or properly attributable to a person, institution, etc." So what does it mean in common terms? Credit is the amount of money one is given with the trusted promise to pay it back. So a 'credit' card is a plastic card that represents the amount of money the credit card company believes you will pay back. When you charge an amount on the card, you are promising to pay that amount back to the company. For example: If a 'credit' card company gives you five hundred dollars worth of 'credit', it means this is money you can use but the credit card company expects you to pay it back to them (with interest). When you make a payment to the company they will credit your account for that amount.

A bank will 'credit' your checking account for any deposits to your account. In most cases credit means a plus (+) to an account. That means if you see credit on your checking account it is something the bank is adding to your account. If you see credit on your credit card statement it is something that you have paid to the credit card company or something that they are giving back (such as an incorrect charge). This increases your amount paid and decreases your balance owed.

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What is a transaction?

A transaction is something someone does with another person(s) or institution(s). Using a credit card to make a purchase or depositing money into your checking account are examples of transactions. Transactions happen all the time in the financial world. By understanding how they work, transactions will make more sense. It can also help you to keep your own finances in order.

Examples of transactions in the financial world:

  • Depositing money into your checking or savings account
  • Removing money from your checking or savings account (either with a check or debit card)
  • Buying or selling stock in a company
  • Paying on your credit card or personal loan
  • Paying or getting a mortgage
  • Buying gas (and/or using your credit or debit card)
  • Buying product from a store
  • There are endless types

All of these transactions affect you in some way. One might increase your debt to a company. One might pay-off (decrease) a debt to a company. Or one might increase/decrease your checking account. Be sure to track all transactions.

My account balance is what?

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Did you know that a transaction you make today may not show up on your account for several days depending on the type of transaction?

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Look-now they know how to keep the credit and debit fears away.

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Why Debit and Credit are so important

If you do not understand these two little words, financial institutions will confuse you with their statements, definitions, and plus and minus transactions. They can add to your balance, in the case of a checking account, or be deducted from your balance, in the case of paying your monthly credit card payment. But each time the words can mean very separate things.

The smaller credits and debits can really confuse you. For example: a credit card company charges you a fee that is incorrect. You call the company and they correct the amount by 'crediting' your account for the amount in error. This will 'lower' your balance owed to the company. Banks might charge fees on your checking or savings account that will be 'credited' to your account. This credit will lower your balance available for use in your checking account.

Using an ATM can be very tricky because the debits and credits can erase your balance before you know it. For example: an ATM fee, a debit or credit amount that hasn't been applied yet (such as a check that has not yet been cashed) or an amount not recorded in your register. When checking your balance, be sure you have taken all charges and payments into account. Charging money on an account where there are charges pending might lead to an overdrawn account and fees (bank fees as well as company fees for the 'bounced' check). It might also lead to companies refusing to accept your check or debit card due to insufficient funds.

Remember all of your transactions when check your credit balance.

Insufficient funds or an overdraft

Insufficient funds, it sounds like something that was put aside because it was bad (just kidding). Insufficient funds means not enough money. It is that simple. If you write a check to a company but you do not have enough money in the account to cover the check the check will be sent back to the company labeled with 'insufficient funds'. Or you might try to use your debit card someplace and the little machine you swiped it in comes up with those two words that tell the company you don't have the money to pay for your items. This means they will refuse your card.

Ah, my account is in good shape, no insufficient funds here. Now I can relax!

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How accounts work

Your debit card and checking/savings account is the one you need to worry about most when making transactions. Why? Because every time you use your card or write a check your account is affected in some way. But, some items do not affect the account right away. And some affect the account at the exact time you make the transaction.

Things you should be aware of for your account

Fees
Delayed Charges
Holds on Funds
Your bank may charge you a fee for using another banks ATM
A check you write today may not be cashed right away by the company
You might deposit a check from a company or friend, but the bank doesn't let you have the funds until the other bank pays them the money
Your bank may charge a fee if your account goes below a specific amount
If the system goes down at a company, they may not charge your account right away
A gas station might put a hold up to $100 onto your account until the actual charge amount has been paid
Fees might be charged on your account unless you have something like direct deposit or a checking and savings account that are attached
When your actual bank is in another state
If your accounts are 'attached' to each other one account might be charged to pay for overages in the other account
Be aware of these items before you assume the balance an ATM gives you is correct. Using a form, such as a check register, to record all transactions can help you track your charges. And don't forget to ask about fees and penalties.

I get it now. Whew!

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To summarize:

  • A debit is a plus (+) to your checking account but a minus (-) to your credit card balance.
  • A credit is a minus (-) to your checking account but a plus (+) to your credit card balance.
  • Fees, overdrafts, late charges etc. will all affect your balance no matter which account you are addressing.
  • Be careful to keep track of all transactions (especially with checking accounts, savings accounts, loans and credit card companies).
  • Save those receipts and record everything including confirmation numbers and dates of the transactions.
  • Don't go shopping using money you had actually used earlier to pay for something else. Be aware of your balance at all times.
  • When you are approximating an amount always assume the amount in your checking account is lower not higher.
  • Always assume the balance on your credit card is higher not lower.
  • Knowing about fees and penalties will keep you on track with your balance.

© 2017 Cheryl Simonds

I would truly love to hear from you.

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    • FlourishAnyway profile image

      FlourishAnyway 3 months ago from USA

      I'm going to provide this to my teen daughter who has just started to dip her toes into banking. I love your use of cats to illustrate. They are so expressive.

    • cherylone profile image
      Author

      Cheryl Simonds 3 months ago from Connecticut

      Thank you FlourishAnyway. I hope this hub helps her to understand the banking language. Glad you like the kitties.

    • zaton profile image

      Zaton-Taran 3 months ago from California

      Great hub on credit card information that *should* be common knowledge, but far too many people aren't aware. LOL I take it you like cats....

    • cherylone profile image
      Author

      Cheryl Simonds 3 months ago from Connecticut

      zaon, yes I 'like' cats :) I agree that this information should be common knowledge, and you are quite correct about not enough people knowing such things. Thanks for visiting.

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