Uncovering the Difference Between Debit and Credit Cards

Although it may seem like light years ago, there was a time when cash was the common form of payment. These days it’s rare to find someone in a grocery line pulling currency out of their wallet.

According to an article on the New York Times website, credit cards have been around since the 1950s, and debit cards were introduced in the mid-1970s. By 2006, there were 984 million bank-issued Visa and MasterCard credit and debit cards in the United States alone.

Today, both debit and credit cards provide a safer and faster alternative to cash. Approximately 12 percent of all retail noncash payments are made through the use of debit cards. That’s five times greater than the number of payments made by using a debit card just five years ago, according to the Federal Financial Institutions Examination Council.

While used interchangeably, debit and credit cards should never be confused with one another.

Unlike credit cards, debit cards are linked to your checking account so that every time you make a purchase, the full amount is deducted from your account. This feature is convenient in that it reduces the probability that you will overspend.

When using a debit card that is linked to your bank account, you are usually asked if you would like to use your card as a “debit card” or a “credit card.” The difference here is that when you process your debit card as a “debit” transaction, you will be asked to input a four digit pin number and your purchase amount will be immediately withdrawn from your account.

On the other hand, opting to have your debit card processed as a “credit,” transaction will usually require your signature and delay the time it takes for the merchant to pull the money form your checking account.

Alternatively, credit cards allow the user to essentially borrow money to make a purchase, and then pay back the lender at a later time. However, delaying your repayment will cause interest to be added to the amount you owe, so that dress you bought on sale with your credit card may end up costing you more than you think. For instance, if you have a credit card balance of $1000, and it takes you three years to pay off your credit card, you will really have paid $1247.95, according to a loan calculator on bankrate.com.

One advantage of credit cards over debit cards is the protection against any disputed charges. According to the Fair Credit Billing Act, your credit card issuer can withhold payment from a retailer if you should decide to dispute a purchase. Make certain that you are aware of the billing cycle and due date, find out if there are any penalties for not using the card. If the credit card issuer is offering a special promotional interest rate, find out how long the special rate applies.

If you are looking to apply for a credit card, make certain that you understand the terms and conditions of your card, be aware of any fees you may incur and your interest rate, keep in mind that the credit card issuer may raise your interest rate after the card has been opened. Additionally, keep in mind that these regulations may vary once changes implemented by the Federal Reserve go into effect later this year.

Remember, just because you qualify for a $5000 Visa card does not mean that you should go out on a shopping spree the minute the card arrives in the mail. Use your debit and credit cards wisely so as not to get caught up in the debt cycle.

Do you prefer plastic or cash? Tell us! We want to hear about your experiences and find out which method works best for you and why.

Comments

[EPEFCU]

Debit Card Advocate,
Thank you for your comment! You make a great point. Debit cards are an excellent way to teach students the importance of learning fiscal responsibility early on. According to a survey conducted by the Federal Reserve Bank of Boston, there are 609.8 million credit cards held by U.S. consumers today. These daunting statistics serve to show the importance of teaching young adults how to manage their finances properly, without having to rely on credit cards to make purchases.

[Debit Card Advocate]

I belive in Debit Cards, my children are college students, with part time jobs, they don't have time for checkbook balancing as so forth. Their mother and my self take care of their finances at home. It is far easier for them to use the debit card, than worry with a student credit card and the interest.