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Debit Vs. Credit

 

I’ll bet that more often than not, when you step up to a cash register, you make your purchase using a plastic card. Debit and credit cards are used so frequently and are used so similarly that many Americans see no distinction between them. Unfortunately, there are very important differences between the two types of cards. As consumers, we need to know how they differ.


 

Let’s start with the basics.

Credit cards provide you with access to a loan from the card issuer.  When you make a purchase with a credit card, you are using the bank’s money, not your own. In return for using the bank’s money, you are charged interest and fees. Using a credit card, you can spend money that you don’t have in the bank. Because credit cards are a form of credit, with responsible use, they are a great way to build a good credit history.  However, misuse a credit card or make irregular payments, and you can hurt your credit score just as easily.

Debit cards give you access to your own money. Using a debit card removes money from your checking account just as though you had written a check. Using a debit card, you can only spend the money that you have in the bank.
Debit cards do require you to enter a PIN number for most transactions, making their use by thieves a bit more difficult than credit cards.


Credit cards and debit cards offer different degrees of protection.

Credit cards provide better protection against fraudulent use. If your credit card number is ever stolen and thieves use it to make purchases, you are better protected than if they stole your debit card number. If you report your lost or stolen credit card before thieves use it, you are not responsible at all. If you report the loss of your card after it is used, your liability is limited to only $50. Fraudulent use of your credit card means that the bank’s money is being stolen, not yours. As a result, your bank will be very motivated to solve the problem.

Using a credit card also allows you to prevent payments from being made when you are not satisfied with the goods or services that you purchased.

Debit cards offer less protection from fraudulent use. When thieves use your debit card, the money comes straight out of your bank account. That means your money is gone, and other legitimate checks could bounce. Your cash flow is directly impacted. However, you may not be completely on your own. If you report the loss of your card before the thieves use it, you are completely protected from liability. If you report the loss within two days of the fraud, your liability is only $50. Between two and 60 days after the fraud occurs, your liability jumps to $500. After 60 days, you are liable for the full amount of the fraud. Because downside to debit card fraud is so significant, you should always think twice before making an online purchase with a debit card.


If credit cards offer so much protection, why use a debit card?

Debit cards help you resist overspending and ease the effort of maintaining a budget. Because debit cards limit your spending to the money you have in the bank, you are unable to spend money that you don’t have. Using your debit card’s monthly statement is an excellent tool for tracking where you spend your money.

Debit cards are a better way to access real cash. Taking a cash advance on your credit card is like taking out a very expensive personal loan. Remember, debit cards only give you access to your own money no matter if you are getting cash out of an ATM or making a purchase at a cash register.

Don’t forget the fees and interest that credit card companies will charge you. If you don’t opt in for overdraft protection, you won’t have those same fees when using your debit card.


What is overdraft protection?

When you use your debit card to spend more money than you have in your checking account, the transaction is called an overdraft. Your bank may still cover the purchase for you, but will charge you a large overdraft fee for every overdraft transaction. These overdraft fees are immediately removed from your checking account, compounding the problem. Your bank may also simply decline the purchase.  With overdraft protection, you don’t have to worry about the bank refusing the transaction.

Overdraft protection is available on debit cards and protects you, if you accidently try to spend more money than you have in your checking account. The bank will cover your expense by either tapping into a line of credit or through a link to your savings account. However, the fees associated with overdraft protection may be lower than the fees you will be charged without the protection. 

When your overdraft protection uses a line of credit, the bank automatically loans you the money you need to cover the purchase. Just like any other loan, there will be interest associated with the use of overdraft protection.

Because of the costs involved, you must opt in for your bank’s overdraft protection service.


Credit cards and debit cards are not always interchangeable.

We tend to think that debit cards and credit cards are accepted virtually anyplace that we want to use them. Some businesses, like car rental agencies, won’t even accept a debit card. Their view is that people that can use a credit card are more likely to have the maturity and credit worthiness that they are looking for in their customers.


So, what is the bottom line?

When you consider all of the facts, credit cards and debit cards both have a place in your wallet. Debit cards are great for those small everyday purchases. If you would normally pay with cash, then use your debit card.

Credit cards are better for online buying, travel, purchase of large ticket items, and for unexpected emergencies. Always try to pay off your credit card every month. Carrying a balance on your credit cards is not good financial practice.

 

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