Every time you make a purchase using plastic, whether at the grocery store, retail outlet, or a gas pump, you are most likely prompted to choose whether you are using a debit or a credit card. Other than the fact that one requires a PIN (your four- to six-digit personal identification number) and the other often requires a signature, you may wonder if it even matters which one you choose. Since both typically carry the logo of a major credit card company, what is the difference, anyway? Maybe more importantly, are there any benefits to using one type of card over the other?
While the cards may be similar in appearance, they are fundamentally different – and they work in almost opposite ways. In the simplest terms, a credit card is an instrument of debt while a debit card is something like a digital check. In other words, one card adds to your debt, and the other reduces the balance in your bank account.
Credit cards and debit cards pull from two different sources and are subject to different charges.
Credit Cards:
- pull funds from a line of credit; you borrow money to make the purchase.
- have an established predetermined credit limit.
- do not use your personal funds.
- add the charge amount to the outstanding balance owed to a credit card company.
- bill out balances monthly.
- charge interest on any unpaid balances you carry over to the next month.
- carry variable interest rates that can be extremely high.
- can be used at ATMs to draw money from your line of credit.
- sometimes offer rewards such as cash back or airline miles.
- offer more protection to the consumer if lost or stolen.
Debit Cards:
- draw funds directly from your personal bank account; you spend your own money to make the purchase.
- don’t result in you owing an outside party.
- place a hold on your funds immediately.
- withdraw the funds from your account within 1-3 days.
- do not charge interest.
- can incur overdraft charges and/or account service fees.
- can be used at ATMs to draw money from your personal account.
- offer some protection to the consumer if lost or stolen.
There are benefits to using both kinds of cards.
Choosing the type that is right for you depends on your buying and debt repayment habits. Savvy consumers can take advantage of credit card incentive programs, but debit cards can be helpful for sticking to a budget. The best advice here is: know thyself.
Credit Cards:
- If you regularly pay your credit card bill in full at the end of each month, you might be able to take advantage of rewards programs offered by many credit card companies. Program offers, like for instance, airline miles – can be a great way to help pay for that family vacation. Other programs offer cash back, and those savings can really add up over time.
- If, however, you are not in the habit of paying off credit card balances every month, increased usage could end up costing you more in interest charges than you would gain from the incentive program.
Debit Cards:
- If you need a little help staying within your budget, debit cards are a good way to do that since you can only spend the amount of money in your bank account.
- Your bank may also offer a limited amount of overdraft protection, a benefit that insures they will cover any purchases you make, up to a certain dollar amount, even if you have insufficient funds to pay. This can save you from an embarrassing moment in the grocery check-out line, but it does come at a cost. Any funds deposited into your account will first go to cover the overdraft before adding to your available balance, and the fees for dipping into your overdraft protection are typically in the neighborhood of $35 and up per transaction.
Consumer protections on credit and debit cards are different.
Be sure to read the protections as spelled out by your credit card company or financial institution regarding theft, loss, and chargebacks—a specific type of purchase protection for goods if they were never received, or received but damaged or materially different than advertised. In general, the basic federal protections for credit card losses are much more comprehensive than those for debit cards.
- Credit Card: You are only held responsible for up to $50 of unauthorized transactions if your actual credit card is lost or stolen. You are not responsible for any unauthorized purchases if your credit card number is stolen.
- Debit Card: You are only held responsible for up to $50 of unauthorized transactions if your card is lost or stolen and you report it lost or stolen within 2 business days. If you miss this deadline, you can be held responsible for up to $500 of unauthorized transactions if you report your card lost or stolen within 60 days of the date your statement was mailed to you. If you fail to report the card lost or stolen within these timeframes, you lose these protections and can be held responsible for the full amount of any unauthorized purchases.
Why do debit cards have credit card company logos on them?
Debit card transactions are made using the same networks owned and used by Visa and Mastercard. If your bank-issued debit card has a credit card company logo on it, that card can be used to make purchases anywhere that accepts Visa or Mastercard. Those retailers simply pay the credit card companies a small fee for the use of their network.
If you still have questions about the differences between credit cards and debit cards, or want to talk to someone about debt management and repayment, please do not hesitate to give us a call at DebtGuru.com. Our friendly staff is here to help you every step of the way on your quest for financial knowledge.