In your wallet, you might have both a debit and a credit card and the two have some features in common. Both, for example, allow you to get access to cash, transact business without writing checks and make purchases offline and online. In many cases the physical cards might even look similar, but they are very different tools for your personal finance. This article explains those differences and the implications for how you use them to manage your money.
Debit Cards: The Different Kinds & Fees
Debit cards are a great and reliable source for obtaining cash and helping to purchase items. However, there are two different kinds of debit cards.
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One version of the debit card, which is also called a “check card” or “bank card,” provides you electronic access to your account at a financial institution such as a bank or credit union. You may have this along with a credit card or instead of one because of bad credit. Also, it may or may not have fees, which has been a controversial issue.
In 2011, in response to Durbin Amendment of the Dodd-Frank Law, financial institutions had to cap the “interchange fee” or what they charge merchants for processing debit transactions at 21 cents along with a .05 percent of the monetary value. Consequently some banks proposed user fees for those with debit cards. There was an outcry by consumers and many of those financial institutions backed off, but those fees could return.
To avoid fees, you can set up your debit card with credit unions, which are non-profit. Some of you might be considering doing just that. The problem there is that most users find it difficult to transfer their banking accounts because so much is tied into them including automatic electronic deposits and withdrawals. Therefore, it’s recommended to investigate different fee structures for debit cards before starting to do business with any financial institution.
Credit cards also entail complex fee structures. There have been so many that those varying terms and conditions have become points of competitive advantages and disadvantages for credit card companies.
Another version of the debit card, which is often called the “prepaid card,” gives access to funds which are “stored” on the card and allows users to transact business without being part of a bank. This option is often chosen by those who cannot get or don’t want an account with a financial institution or who want to control the spending of others, such as children and elderly dependents.
Debit Cards vs. Credit Cards
Although debit cards and credit cards appear to be the same card at first glance, they have many differences. Here are some ways in which debit and credit cards are different.
- Fund access & limits: Credit cards essentially represent a loan from the financial institution issuing the cards which sets a limit, that is the credit card maximum, on how much can be borrowed. For purchases, that loan frequently is interest free until the grace period is over, after which you pay interest. For cash advances, interest may start immediately or there could be a grace period. For debit cards you have access only to the amount of money that is already in your checking account or stored on the prepaid card. That is the limit or maximum allowed. With both credit and debit cards, exceeding the limit can incur penalties.
As with all loans, credit cards allow you to take on debt. Debit cards, including those you distribute to others, prevents that.
- Merchant discounts: In much of retail, both are treated the same in that there is no discount for purchases, such as for gasoline, which cost less when paid for with cash. Exceptions include discount retailers such as Aldi which only accept debit cards and cash, not credit cards, which indirectly provides bargains for debit card users.
- Cash back: A growing number of merchants, such as Wal-Mart, provide cash over the amount of the purchase for both debit and credit cards, for no extra fee.
- Protection: By federal law, both offline and online, credit cards offer unique protection against unauthorized purchases, scams and dissatisfaction with items. Those issuing the card assume that financial burden. In addition, some provide added warranties without extra costs. With debit cards, the money is immediately withdrawn from your account and there is very limited protection from those issuing the cards. Entire bank accounts have been wiped out in scams, such as asking for your debit card information and PIN number. A fake card is created and you become a victim.
Because this is such a pressing issue, some debit cards offer some protection against identity theft.
- Rewards: Those issuing credit cards compete through benefits, such as discounts on certain purchases and rewards such as cash back and frequent flyer miles. Some debit cards do have perks, but usually not comparable to those of credit cards.
- Credit history: “Good behavior” with a debit card does not help build a positive credit history. That’s why those needing that credential for applying for jobs and mortgages or rentals make it a goal to establish or repair their credit. There are special credit cards for college students for that purpose.
- Acceptance: Globally, both cards are increasingly accepted, though often with transaction fees imposed. Investigate this before traveling.
The world is moving to a cashless, check-less financial exchange system, therefore it’s practically necessary to equip yourself with “plastic.” For that reason, debit cards have evolved into a must-have for those who do not want or cannot get credit cards. When it comes to overall usefulness, protections and benefits, credit cards represent the better choice. However, for convenience more individuals and businesses have both. Also, given the competition in the financial industry, the terms and conditions for both will continue to change; therefore, you must monitor what deals are being offered.