Until a few years ago, telling the difference between a debit card and a credit card was fairly easy. A debit card was used at an ATM machine to withdraw or deposit cash with a PIN number and the credit card was used at check-out to buy things. Now the differences aren’t too obvious. Both carry the same logos and both can be swiped to make purchases. Despite these similarities there are clear differences.
A debit card is directly linked to your bank account, so every transaction you make deducts from this account. Not only could this discourage overspending but can be useful if you want to spend within a fixed budget. If you exceed your balance, many banks offer overdraft protection which either charges an overdraft fee or allows you to borrow from an overdraft account with or without interest according to policy.
Credit cards offer you the option of paying for more than you can currently afford. You are basically borrowing the card issuer’s money to make purchases. Usually a period of 15-45 days is given to pay the amount back interest-free. Obviously problems arise when you can’t pay back in a timely fashion resulting in rapidly accruing interest. Nevertheless, if used responsibly, credit cards can confer benefits in the form of “rewards” through cash-back, gift certificates, discounts, etc.
Also, credit cards and debit cards have different legal protections associated with each when dealing with problem transactions. Under federal law, in the event of a stolen credit card, you are responsible for the first $50 dollars of the unauthorized transaction. If the transaction was made online, you are free from liability. Visa and MasterCard offer Zero-liability policies which can be another tier of protection against unauthorized purchases. If you notice a fraudulent charge, enter a dispute claim by notifying the card issuer and the charge should be removed.
For debit cards, the rules are similar but a lot less broad. Your liability remains $50 only if you notify the card issuer within 2 business days; the liability could increase to 500 dollars. Most transactions are via PIN number access: funds are deducted from your account within 24 hours. Due to the fact that your money has already been transferred by the time you raise suspicions, you do not have the leverage that exists with credit card purchases to dispute fraudulent transactions. Credit card purchases, usually done with signatures, require 2-3 days to process.
In conclusion, the most effective way to utilize your non-cash options is to utilize the advantages of both. For instance, use your debit card for day-to-day cash expenses such as groceries or gas and count on the added protection of credit cards when you purchase things online.
Source: Barrett, Jennifer. “Credit and Debit Cards: What You Need to Know.” New York Times. 6 Jan. 2009. 10 Sept. 2009.
- What is Fraud Alert? - February 19, 2014
- Budgeting on a Fixed Income - January 18, 2014
- Difference Between Credit Cards and Debit Cards - January 10, 2014