If you’re like most Americans, you have at least one credit card and one debit card in your wallet. While they look almost identical to one another, understanding their differences will help you to make smarter financial decisions.
It’s good to note that credit and debit cards are generally accepted at the same places. You can typically use your debit card at any retailer that accepts credit card payments. The major difference between a debit card and a credit card is where the funds for your purchases come from. A debit card pulls the funds directly from your bank account, while a credit card essentially loans you the money, and you’re required to pay it back at a later date.
So what’s the deal with being asked at the checkout counter if you’d like to use your debit card as “credit or debit”? The reason is that debit card purchases can either be processed as “PIN” or “signature” transactions. With a PIN transaction, you must enter your debit card PIN number, and the purchase cost is immediately deducted from your bank account. With a signature debit transaction however, you are only required to sign a receipt – no PIN number necessary. And even though the funds for a signature-based debit transaction will ultimately come out of your bank account, the transaction itself is authorized by a credit card company. That’s why you’ll notice a credit card company logo on the front of your debit card. This is also the reason why signature debit transactions are sometimes referred to as “credit” transactions.
Some of the benefits of using a debit card over a credit card include:
• They can keep you from racking up debt.
Because the funds come out of your bank account, using a debit card is similar to paying in cash, just more convenient. As long as you keep tabs on how much money you have in your account, you’ll avoid costly overdraft fees and won’t be accumulating debt. With credit cards on the other hand, it can be very easy to spend beyond your means. Since the money doesn’t immediately come out of your bank account, it can almost feel like “play money”. And, if you only pay the minimum amount due on your credit card bill every month, you could quickly find yourself swimming in expensive interest fees – and those fees could take months, or even years, to pay off. There are also other credit card fees that could potentially add up, such as annual fees and late payment fees.
• They can be easier to get.
If you haven’t established a credit history yet, or if you have a low credit score, a debit card can be easier to obtain than a credit card. Typically, anyone who has a checking account can get a debit card, and a poor credit history won’t necessarily prevent you from opening a checking account. While most banks do vet customers prior to allowing them to open an account, they typically use systems like ChexSystems, Telecheck, and EWS, rather than a credit report, to check for specific things like prior bank fraud or bank account abuse.
However, credit cards have some distinct advantages as well:
• They can offer more protection from a liability perspective.
As long as you report the loss or theft of a credit card in a timely manner, the most you will be on the hook for in terms of fraudulent purchases is $50. The Electronic Funds Transfer Act provides debit card holders this same protection from loss or theft, but with a catch – you must report a missing debit card within two business days. If you report the lost card between 3 and 59 business days, your liability can rise to $500. After 60 business days, there is no limit to how much of the fraudulent spend you’ll be responsible for. It’s worth noting that some debit card issuers do offer more extensive liability protection, but they’re not required to by law.
• They can provide extended warranties.
Depending on which credit card you have, eligible purchases that you make with your card could be covered under extended warranty coverage
, at no extra cost. This could save you from having to purchase extended warranties offered by the retailer.
• They can help with merchant disputes.
Let’s say you booked a hotel room online, and already paid for a one-night stay. You go to check into your room and find that it looks nothing like the photo you were shown on the hotel’s website. There’s two twin beds instead of the king you were promised, and the place is filthy. You demand a refund, but management won’t budge. Luckily, if you booked with your credit card, you can file a dispute with the card provider and potentially get your money back.
• They can offer rewards.
Many credit cards offer incentives in the form of rewards. There are different types of credit card rewards programs out there, but the concept is the same – you earn a certain number of reward points for every dollar you spend using your credit card. Once you rack up a certain number of points, you can redeem them for cash, gift cards, frequent flyer miles, and more, depending on the card. It’s worth noting that there are banks that offer debit card reward programs. These types of programs aren’t as easy to find as credit card reward programs, but they’re out there.
Deciding which card to use will depend on your unique circumstances. Your current financial situation, what you’re purchasing, and where you’re purchasing, will all play a role in your decision to use one type of card over the other. Just be sure you know which card you’re grabbing before making a purchase!