One of the most popular questions about plastic carried in the wallet is, “How are credit cards different from debit cards?” They physically look the same and can be used to make purchases but are very different. There are 3 essential things to know when deciding whether to use a debit or credit card.
A Debit Card Works Like A Bank Check, And A Credit Card Acts Like A Loan
In using a debit card for your purchases, the money is collected directly from your checking account. Plus, you don’t have to pay interest on a debit card. Instead you pay for the charge immediately, with your own funds. A credit card is more like a loan because each time you make a purchase you are borrowing money from the card company. Every month you can carry a balance, based on the purchases you made, and are charged interest- similar to a loan. The card company will give you the option to make a monthly payment or to pay the balance in full. If you plan to make monthly payments be sure to look for the lowest possible interest rate.
Know Your Credit History
Before a financial institution lends you money, they want to evaluate the risk of you not paying them back, so they check your credit history. If your credit isn’t good enough, your credit card application will be rejected. Most likely, if your credit history is poor, they will charge you a very high interest rate that makes having the card very unappealing. On the other hand, as long as you have a checking account, your bank is happy to issue you a debit card, so that you can access your funds electronically. This is why it’s so easy to get a debit card, but it can be more difficult to qualify for a credit card – especially one that offers lots of valuable perks like cash back or airline rewards.
Protection- Lost, Stolen, Or Hacked Cards
Thanks to new regulations imposed by the federal government on credit card companies, the liability of a cardholder for losses in case of fraud is limited to $50. As long as you report the loss or theft of your card or other incidents of unauthorized use, your maximum possible loss is $50. The card issuer will remove the false charges and you will not be required to pay.
Protection for debit cards, highly depends on when you report the fraudulent activity. If you report a debit card missing before someone uses it, you are not responsible for any unauthorized transactions. If someone uses your debit card before you report the card lost or stolen, your liability (loss) depends on how quickly you report it. Our best advice is to check your monthly statement!!!
Possible Debit Card Liability (Loss) due to Theft /Fraud
Business Days are Monday through Friday
Calendar Days are all days on the calendar
While credit cards offer you the most protection, the biggest difference between credit cards and debit cards is how your personal money is effected because of the theft. Since a credit card is more like a loan, when fraudulent charges are made, the credit card company will not include it in your bill, nor would you have to pay for any losses.
When using your debit card to make online purchases, you risk hackers having access to your personal financial information. A debit card automatically pays for purchases from your checking account. If fraudulent charges occur on a debit card, money will be withdrawn from your account. Eventually, you will be reimbursed by the bank for the lost funds but depending on your bank’s policies , it may take weeks for the bank to investigate and return your money!
Credit cards offer the best protection overall but if you can’t get a credit card or prefer to use cash to stay on budget, debit cards are a good alternative. Always check your monthly statements to protect yourself against any fraud.
Writer: Tom Kerr
Tom Kerr is a freelance writer, who frequently contributes to: consumer magazines, trade publications, and personal finance blogs. He has fifteen years of experience within the personal finance industry.