Credit Card Và Debit Card
Debit & credit cards offer more than a way to lớn access money without having to lớn carry around cash or a bulky checkbook. Debit cards are like digitized versions of checkbooks; they are linked to lớn your bank account (usually a checking account), và money is debited (withdrawn) from the account as soon as the transaction occurs. Credit cards are different; they offer a line of credit (i.e., a loan) that is interest-free if the monthly credit thẻ bill is paid on time. Instead of being connected to lớn a personal bank account, a credit card is connected to lớn the bank or financial institution that issued the card. So when you use a credit card, the issuer pays the merchant & you go into debt lớn the card issuer.
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Most debit cards are không tính phí with a checking account at a bank or credit union. They can also be used to conveniently withdraw cash from ATMs. Credit cards have the advantage of rewards programs but such cards often require an annual fee to use. Financial responsibility is a big factor in credit card use; it is easy lớn overspend & then get buried in overwhelming credit card debt at a very high interest rates.
This comparison provides a detailed overview of what debit and credit cards are, their types, associated fees, và pros và cons.
Comparison chart
| Credit cards are lines of credit. When you use a credit card, the issuer puts money toward the transaction. This is a loan you are expected lớn pay back in full (usually within 30 days), unless you want to lớn be charged interest. | Any time you use a debit card to buy something, money is deducted from your account. With a debit card, you can really only spend the money you have available lớn you. |
| Not required khổng lồ be connected to a checking account. | Checking or Savings Account |
| Yes | No |
| Somewhat difficult, depending on one"s credit score and other details. | Easy, with basically no barrier to lớn receiving a debit card. |
| The credit limit mix by the credit issuer. Limits increase or stay the same over time as a borrower"s creditworthiness changes. | However much is in the bank account connected to lớn the card. |
| If a credit card bill is not paid in full, interest is charged on outstanding balance. The interest rate is usually very high. | No interest is charged because no money is borrowed. |
| Credit cards in the U.S. Are not very secure in & of themselves because many still use dated card security technology. However, consumers are not held liable for this poor security. | A sạc makes them secure so long as no one steals the thẻ number and PIN, và as long as you don"t chiến bại the card itself. If the card/info is stolen, debit cards are very insecure. |
| Low. Rarely held liable for fraudulent activity. If you are, you are only held liable for a maximum of $50. | High. If someone steals your card & makes purchases, that money is removed from your bank account. Investigating this damage takes time. The longer you wait to report the fraud, the more likely you will be held liable for your own losses. |
| Responsible credit thẻ usage và payment can improve one"s credit rating. Credit cards typically report account activity to at least one of the three major credit bureaus on a monthly basis. | Does not affect credit history. |
| Low. Some credit card companies allow to lớn overdraw amount over the maximum credit line with a fee. | High "overdraft" fees. Possible khổng lồ overdraw amount over the trương mục limit. |
| In the U.S., this is uncommon, but PINs are being phased in. | Usually |
What Are Debit Cards?
A debit card is always tied khổng lồ a checking account, so they are also sometimes known as "checking cards." Any time you use a debit thẻ to buy something, money is deducted from your tài khoản — usually on the same day, if not immediately. For example, if you have $1,000 in an account và spend $30 using a debit card, $30 is removed from the checking account, leaving behind $970. With a debit card, you can really only spend the money you have available khổng lồ you. If you only have $970 left, spending any more than that may result in an overdraft charge.
When you use a debit card for an in-person (not online) transaction, you must use your personal identification number, or PIN, lớn approve the transaction. When you use a debit thẻ for a credit card-like transaction, you will normally have to lớn sign a receipt (in the U.S.). However, signature requirements are being phased out in favor of PINs, so soon there will be no difference between the experience of using a debit thẻ for a debit or credit transaction.
It is easy khổng lồ apply for a debit card. Any ngân hàng or credit union that you have a checking tài khoản with will issue you a debit thẻ upon request.
What Are Credit Cards?
Unlike debit cards, credit cards are not connected to a checking account. Instead, they are tied lớn a financial institution, such as a ngân hàng or credit company, that is in the business of issuing revolving lines of credit to consumers. Whereas a debit thẻ transaction is mainly between the buyer & seller, a credit thẻ transaction specifically involves a third party: the institution who has loaned money to lớn the buyer.
For example, if you use your credit card to buy $30 of groceries, you are not directly paying the grocery store. Instead, the grocery store is paid $30 by the credit issuer. This is $30 that you now owe the credit card issuer.
With a credit card, you are never limited by the amount of money you have in your checking account, which can be one of the major cons khổng lồ debit cards for many consumers. Instead, you are limited by whatever the credit limit on the card is. If you are new to lớn the world of credit, a credit thẻ company may only issue you a card with a $1,000 credit limit. This means you only have $1,000 of revolving credit khổng lồ use. Some thẻ issuers increase credit limits over time for those who build up a good credit history by paying off their credit thẻ each month (i.e., paying back their loan).
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It is relatively harder to lớn get a credit card than it is lớn get a debit card, especially for those with no credit history or a poor credit history. When you apply for a credit card, the issuer evaluates your creditworthiness lớn determine how risky it is khổng lồ loan you money. If the issuing company believes you are a poor credit risk, your application for a credit card will be rejected.
Pros và Cons of Using Debit vs. Credit Cards
Most people carry & use both credit and debit cards because both types of cards have their chất lượng advantages.
Acceptance by Merchants
The vast majority of retailers in the U.S. Accept both credit and debit cards, & customers pay the same price irrespective of the payment method they choose. But merchants pay a fee — called interchange fees — lớn payment processors lượt thích Visa and MasterCard for every credit or debit thẻ transaction. This is usually flat fee, plus a percentage of the total transaction. The fees charged for a debit card are much lower than those charged for a credit card. In the U.S., merchant credit thẻ processing fees usually total to lớn about a 2% cut.<1><2>
So merchants prefer it when customers use debit cards. Some merchants, like Costco, only accept debit cards (with the exception of Costco-issued Amex credit cards). Other merchants, like Arco gas stations, offer small discounts khổng lồ customers who pay via cash or debit cards.
Security & Card Theft
The U.S. Lags behind other nations when it comes to credit card security.<3> Debit cards, which make use of a PIN, are more secure cards in and of themselves. However, credit cards are much more secure for consumers in a practical sense when fraud occurs.
If someone steals your debit card information, the thief has direct và immediate access to the funds available in the bank account connected to lớn your card. As it takes banks time to lớn investigate fraud, you will have little immediate recourse. Worse, if you bởi vì not notice and report the fraud soon enough (within two days), you may be on the hook for $500 or more of your own loss. This can make paying bills that you would have otherwise had the money for difficult, if not impossible.
In contrast, if your credit thẻ information is stolen, the thief takes out money from your credit issuer. This is money that you will very rarely be held responsible for if you make a concerted effort to report suspicious tài khoản activity as soon as you are aware of it. Under federal consumer protection law, you can never be held liable for more than $50 of fraudulent activity on a credit card.<4>
Risk of Overspending
With debit cards, you can usually ask your ngân hàng to offer overdraft protection or reject transactions when there are insufficient funds in the account. There is some risk of overdraft fees but you generally cannot spend a lot more money than you have if you use a debit card.
On the other hand, credit card debt can become a nightmare very quickly if you fail khổng lồ pay your bills on time. Most monthly credit thẻ bills list two amounts — minimum payment due & monthly balance. If you only make the minimum payments that are due, interest starts khổng lồ accrue on the remaining balance at staggeringly high rates of 12 khổng lồ 24%. Và since this interest is compounded, it is very easy lớn get mired in a lot of debt. Financial advisors are unanimous in recommending that consumers repay their credit thẻ debt first, before other loans like student loans or home equity loans.
Credit History
It is important lớn build a good credit history for yourself over time. A good credit score ensures you pay lower interest on mortgages and car loans, and lower insurance premiums. Landlords and potential employers also run credit checks.
Debit cards vị not affect credit history at all. But credit cards can play an important role in building credit history. Owning a credit card and paying off credit thẻ bills in full every month makes a positive impact on your credit history. Conversely, owning a credit card but falling behind on payments negatively impacts your credit score.
Getting a credit card requires a lender lớn pull your credit. So if you have a security freeze on your credit, you will have to temporarily lift it khổng lồ apply. Most banks also pull credit when you mở cửa a new checking or savings account but some vày not so you may be able lớn get a debit card without lifting the security freeze.
Rewards and Cashback
For years credit thẻ issuers have been enticing customers to sign up by offering rewards programs for using the card. The more you spend, the more money thẻ issuers make in transaction fees and, possibly, in late payments & interest if you fall behind in repayment. The most common credit card rewards are airline miles, "points" that can be redeemed for cash or discounts at certain retailers, và cash back. A majority of the credit cards that offer rewards also require an annual fee for the use of the card. One exception is the Capital One Quicksilver card, which offers 1.5% cash back on all purchases and has no annual fee.
Banks have also started offering some rewards for the use of debit cards but these are not as strong as credit thẻ reward programs because banks get lower fees per transaction on debit thẻ use. Examples of debit thẻ rewards include fee waiver on checking accounts if the debit thẻ is used three times in a month, và revolving discounts at certain merchant locations.
Interest and Fees
Few debit cards charge monthly or annual fees, nor vày they charge interest. Some credit cards charge an annual fee (which may or may not be worth it, depending on the card"s rewards), và all credit cards charge late fees và interest on debts that are not repaid on time. See also Annual Percentage Rate vs Interest Rate.
The main fee consumers have to lớn be aware of when it comes lớn debit cards is the overdraft fee or charge, which may be as steep as $30 or more per overdrawn transaction.<5> An tài khoản becomes overdrawn when you make a charge that exceeds your available balance. For example, if you have $100 in your account, but spend $120, you have exceeded your trương mục balance by $20 & may be charged an overdraft fee by the bank. If you have not opted in to an overdraft coverage program, your card will simply be declined.
Most banks offer overdraft protection and coverage services for a price. A few banks, such as Ally, support free overdraft protection by linking up multiple accounts so an overdrawn tài khoản will have access lớn "backup" funds.
Not all fees are bad, perhaps. For example, debit và credit cards often charge small fees for transactions carried out overseas, but these fees or rates are often much lower than currency conversion rates you can get at a traveler"s exchange using physical money. (And some credit cards, in particular, have no foreign transaction fees at all.) Of the two types of cards, debit cards are more likely not to lớn work overseas, so confirming their functionality before traveling with them is a must.
Churning
In recent years, a personal finance subculture has risen out of credit card rewards — specifically out of how to lớn take the most extreme advantage of thẻ signup bonuses và card rewards programs. This process, which usually involves signing up for lots of different credit cards (and sometimes later closing them), is usually known as "churning." While not exactly widely known, churning has become popular enough over time lớn have an active subreddit community và garner the attention of financial advice sites và the credit card companies themselves.
Some who are especially careful may benefit from their efforts, but long-term returns may not go as planned, và churning — particularly any and all opening và closing of accounts — can negatively affect your credit score. Churning can be an especially bad idea if you are looking khổng lồ take out a mortgage any time soon.<6>
Payments
Because a debit thẻ is connected khổng lồ a ngân hàng account that it withdraws funds from, as needed, there are no further payment processes to lớn consider. Credit cards, however, are loans that must either be repaid in full by a certain date or have a minimum amount, as mix by the card company, paid onto them at the end of each billing cycle (with the knowledge that interest will be charged on any balance carried over into the next month — the loan left unpaid).
Most credit cards operate on a 30-day billing cycle. In the past, some credit cards operated on different billing cycles that made due dates fall on different days of the month. Following the passage of the Credit thẻ Act of 2009, credit card bill due dates must fall on the same day each month, và no late fees can be charged for payments that are "missed" due lớn the effects of holidays or weekends on the banking system.
Types of Debit Cards
1. PIN-only cards: PIN-only debit cards are linked lớn your bank account and can be used for cash transactions & fund transfer, buy from retailers and pay bills online or by phone. The card holder is required to enter a secure sạc for every transaction khổng lồ establish identity & maintain security.
2. Dual-use cards: Dual-use debit cards are both signature- and PIN-enabled, and tied directly to your ngân hàng account. You can verify your identity either by signing or entering your PIN.
3. EBT cards: Electronic Benefits Transfer (EBT) cards debit cards provided by a state or federal government agency khổng lồ users who qualify for food stamps, cash payments, or other benefits. EBT cards can be used to lớn make purchases at participating retailers or khổng lồ withdraw cash from an ATM, depending on the type of program.
4. Prepaid cards: Prepaid cards are not linked to a specific account, but provide access lớn funds deposited directly on the thẻ by you or a third party. In effect, they work as a store-credit or gift card.
Except prepaid cards, all other types of debit cards are linked to a ngân hàng account, typically a checking trương mục but some savings accounts also offer linked "convenience" cards.
Types of Credit Cards
1. The Standard Credit Card: These are general purpose credit cards with revolving balance (i.e. Credit is used up when purchases are made, và is open again once the bill is paid). Standards cards are usually starter credit cards, usually for applicants with little or no credit history who meet the minimum required criteria.
2. Reward Credit Cards: These cards offer several rewards programs in the size of cash, points or discounts, và are intended to influence your spending. Reward cards usually come with an associated annual fee & a lot of fine print; the key is to lớn make sure the rewards earned exceed the annual fee.
3. Secured Credit Cards: Also known as pay-as-you-go cards, their primary purpose is lớn give people with bad credit history a chance to lớn reestablish credit. The user first deposits a "secure" amount (say $300-$3000) —typically into a savings account — that makes for the credit line. The credit limit is usually a percentage (50%-100%) of this amount. These cards come with an annual fee và a high APR.
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4. Charge Cards: Charge cards do not have a preset spending limit và balances must be paid in full at the kết thúc of each month.
