It Pays to Know the Difference Between Credit and Debit Cards

Bank-issued debit and credit cards are used every day, and have become common in shopping and paying bills. Credit cards were introduced in the 1950s, while debit cards came out in the mid-1970s. By 2006, there were more than 984 million bank-issued Visa and MasterCard credit and debit cards in the United States. Whereas debit and credit cards may look the same,  there are major differences in how they work and in how much you might be paying for the convenience of using them.

Following are some of the major features and differences between each type of card:

  • Credit cards are attached to a bank-issued line of credit. Every time a charge is made, the amount of available credit decreases, and your balance increases. Interest is charged if a balance is carried, and the bank will bill you for a minimum payment. You can spend more money than you actually have by using credit cards, but their use offers some protections, and credit cards can help build credit if used wisely.
  • Debit cards are bank-issued cards that are attached to your savings or checking account. They look like credit cards and are accepted in stores and online. Each transaction using the debit card will decrease the balance in the bank account it is tied to. Unlike credit cards, debit cards typically require a PIN (personal identification number) when used in electronic machines. Debit cards do not help build credit.
  • Credit cards may encourage “impulse buying.” Unchecked use of a credit card can endanger your credit score and finances. Banks make money by charging high rates of interest on credit card balances, annual and over-the-limit fees, late charges and cash-transaction fees. If a credit card is stolen, the thief can easily make online or phone purchases.
  • Debit card users must keep up with their bank account balances. It is easy to use the debit card, forget to record the amount in a journal and later find that there was not enough money in the account to cover the expenditure. Purchasing something with a debit card is like spending cash. If there is a dispute, the merchant already has your money, so it may be harder to resolve. Credit cards, on the other hand, do offer some protection by way of allowing you to dispute unauthorized or unsatisfactory business transactions, as follows:
  • You have protection from federal law if you dispute something on a credit card. The Fair Credit Billing Act relieves you of liability for fraudulent charges or undelivered or low-quality goods. You have less protection in the case of a problem with your debit card. If your debit card is stolen, the Electronic Fund Transfer Act allows for a $50 cap on unauthorized use of missing or stolen debit cards if you report the loss or theft to your bank within two days of the transaction date.  For major purchases, it is far more advisable to use a credit card -never a debit card.

As with any financial tool, credit and debit cards should be used wisely.  Many people treat credit cards as extra available money, which they are in a way, but they are really a means of borrowing at an extremely high rate of interest unless you pay the balance each month.

If you would like to learn more about credit and debit cards and about how to take control of your current personal financial situation, visit the Consumer Protection page of the Federal Trade Commission web site.  You can also check out some excellent books at TSCPL on personal finance, in the 332.024 section of our Non-Fiction stacks located in the west wing of the Library.