What’s the Difference Between Credit Cards and Debit Cards?

Plastic plastic!!  Credit cards and debit cards are both plastic cards and can be used with equally ease with most merchants.  But, they are very different. Credit cards use a line of credit issued by a bank and debit cards are connected to your checking account, so it’s your money.  More on each type of plastic…

Credit card

A credit card is structured like a promise to pay back your lender at a later date.  You have a closing date for the account and are sent a bill that you pay within 22 days.  You don’t pay immediately for your purchases, so you have the use of the money until you are billed, which is called “float”. You can either pay in full or carry a balance but you must interest on the balance. It is accepted at most businesses.  No PIN is needed, so if the card is stolen it is can be used easily by thieves.  The card number can be stolen and used for online purchases without the actual card.

You have more protection with a credit card to handle disputes, errors or fraud.  The card issuer removes the amount until the investigation is complete and doesn’t charge you anything.  Disputes or errors regarding a merchant are charged back to them.  There are rewards offered with cards such as cash back, merchandise, travel, etc. Credit cards are reported to the credit reporting agencies, which helps build history which is good if you pay on time and keep your balances low.

Advantages

  • Have float with your money
  • Pay later
  • Convenience
  • Build credit history
  • More rewards
  • Better protection

Disadvantages

  • Too easy to use and get into debt
  • Need to be aware of your spending activity and limits
  • Pay interest if don’t pay in full, can become unaffordable
  • Can damage credit making late payments
  • Easy to use by thieves

Debit card

A debit card is linked to your checking account and is treated like cash.  The purchase amount is taken out of your account immediately or in a few days.  You can keep track of your spending and know how much you have in your account, but you need to record the purchase in your checkbook. A PIN is used for protection when used at POS machines at merchants or ATMs.

Incorrect withdrawals are not refunded until investigation is completed by the bank, which can take weeks.  You have short time frame to inform them of disputes, under 2 days costs $50, 2 to 6 days can be up to $500 and no coverage after that. If your PIN is stolen thieves can create a fake card and use it at ATMs.  Overdraft fees are charged, if you bounce checks.  Debit cards aren’t credit and aren’t reported to the credit reporting agencies.

Advantages

  • Pay as you go, stay out of debt
  • Easier to budget
  • Use PIN number for protection

Disadvantages

  • Fewer protection for errors or disputes
  • Money not returned until investigations completed
  • PIN can be stolen
  • Have short time frame to inform bank of disputes
  • Doesn’t help build or rebuild credit
  • Can be charged excessive overdraft fees

You need to weigh the pros and cons to each and determine what works best for you.  You may decide to use both.  Use credit cards for large ticket items and items for which you want more protection and use debit card as you  would use cash.  Credit cards can get you into trouble if you spend beyond your means, which also impacts your credit. Debit cards can get you into problems, if you spend more than is in your account.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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