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Aren’t Credit and Debit Cards the Same?
Credit and debit cards seem, on the surface at least, much like each other. In fact there are several important differences worth exploring that might save you money.
The credit card system is based on the credit worthiness of the user where the card issuer provides a revolving line of credit to the user. This means that the user is effectively spending the issuer’s money.
The card issuer is the bank or institution to which a user will apply for a card. You can read more here to find out about the issuers and their terms and conditions.
The debit card system is based on the account holder’s personal account details. While there are some subtle differences, a debit card is best understood as a form of advanced ATM card.
Again, the debit card may be operated by Visa, Mastercard or one of the local equivalents. The important distinction is that with the debit card, you are spending your own money.
This means that with a debit card, you only spend what is in your account and, unless previously agreed with your bank, you are limited to your available funds.
What Happens When You Spend More Than is in Your Account?
In reality this is not always the case with a debit card, and in fact you may be able to spend more than your bank balance, but you will be charged for this facility.
In the US you have to ‘opt in’ if you want this facility, but most issuers will stop any transactions that are over and above your balance.
What Happens When You Go Over Your Credit Limit?
With a credit card, you have an agreed limit that you cannot exceed. If you pay off your balance within the “grace period” you will not have to pay any interest. However, in some cases, if your balance is $1.00 short of full payment you may be charged interest on the full amount that you spent for the preceding period since the balance was zero.
The methods of calculating interest are complex and differ between institutions. It is always a good idea to get a firm handle on the fine print before signing.
Should one be a victim of fraud, that is, you lose your card or it is stolen and somebody tries to use it, then you are better covered with a credit card than a debit card.
In the US, the customer is liable up to $50 if the card is reported lost or stolen within two days (48 hours) of the theft or loss. In some cases, the issuer will swallow this cost to maintain customer loyalty.
However, between 2 days and 60 days after the loss/theft is noticed, the credit card issuer is still liable for all funds over and above $50 but in the case of the debit card, the customer is now liable for funds spent up to $500. (Barb’s comment, when my credit card was compromised, the company waived my $50.00 liability)
There is relatively good consumer protection on both debit and credit cards and until recently, both Visa and Mastercard prohibited minimum/maximum spends on cards controlled by merchants.
There are advantages and disadvantages to both card systems and your choice will depend on your personal spending habits. (Barb’s comment; I use a combination of both debit and credit, as well as some cash)
Guest post by Money Supermarket, from across the pond, with international applicability.
image credit; hmt08