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Credit Cards and Debit Cards may look similar, but they have notable differences that should be addressed. Debit cards make it easy for people with a checking account to withdraw and spend money that they have deposited to their bank account. Credit cards are made for consumers to borrow funds from the credit card issuer for the certain credit limit they are given so they can make purchases or withdraw cash.
Let’s start with Credit Cards.
First, I just want to mention the different types of credit cards and how each one has different benefits that they provide their users.
Standard cards are just credit cards that give a line of credit to their users.
Rewards cards offer you perks like cash back, discounts, travel points, and many other perks unavailable to debit card holders.
Secured credit cards require an initial cash deposit which is to be used as collateral by the credit card issuer.
Charge cards do not have a preset spending limit, but usually will not allow for unpaid balances to continue on from month to month.
Credit cards provide their users with access to a line of debt that is distributed by a bank. Credit Cards are usually seen as better for their consumer protection.
They can protect you better with their warranties and fraud protection. Federal law under the Fair Credit Billing Act limits your liability if you are a victim of fraud.
The act says that the maximum liability for purchases made after the card disappeared is just $50 when you report the theft within 60 days.
The Fair Credit Billing Act also gives credit card users the ability to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping. This means that credit card providers will only restore the purchase amount that has been deducted if the dispute is withdrawn or settled in the merchant's favor. The law can be more forgiving toward credit card holders vs debit card users.
My credit card with Discover allows me to receive 1% cash back on all of my purchases, along with an additional 5% cash back bonus for the special deal that they have each quarter. For example, for this quarter I get an additional 5% cash back when I spend money on Amazon, Walmart, and Target. As a University student, I also get 20 dollars worth of cash back credit when I submit my GPA for Discover’s Good Grades program every year.
I have a second credit card with Capital One Bank because their credit card did not charge foreign transaction fees when I left the country to study abroad. This can be an important feature on a credit card if you like to travel because it will save you money in the long run.
It is important to note that these benefits only apply if you pay your whole credit card bill on time every month. Some credit cards charge an annual fee to pay for extra fraud protection and other added benefits that the card may have. All of my credit cards do not charge an annual fee, but this is not the case for everyone so make sure to check the fine print when you sign up for yours.
Some people believe that the annual fee is worth it for the amount of benefits they receive from using the card, but again, this all depends on what you are looking for in a credit card.
As a student, I personally would only want a credit card with
no annual fee
cash back on purchases
sign-up promotions and bonuses
The ability to earn rewards with 0 foreign transaction fees
As a credit cardholder, you make an agreement with the financial institution you got the credit card from to pay their money back with interest if you miss a payment. Make sure to always pay back your credit card debt on time every month to avoid paying their high annual percentage rates, also known as APR.
APR percentages vary depending on your credit card company and represent the yearly cost of funds over the term of the credit card loan. Not paying your credit card debt on time can really hurt your credit score. If you want to learn more about what a credit score is, listen to episode 3 What is a Credit Score and How to Protect Yours.
Credit Cards can be a great tool for starting to build up your credit score as long as you pay all of your bills on time. Your usage of a credit card appears on your credit score report and can help build or hurt your score depending on how your payment history.
Credit Cards can hurt your credit if you close the account so always be wary when deciding to terminate yours, especially if it is your oldest line of credit because that is taken into account when creating your credit score.
Next up is Debit Cards.
Just like the credit cards, there are also different types of debit cards.
Standard debit cards draw money from your bank account
Electronic Benefits Transfer or better known as (EBT) cards are debit cards that grant qualifying users to utilize their benefits from the state and federal agencies to make purchases
Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was pre-loaded on the card
Debit Cards are different because they take money directly from your bank account. For this reason, Debit cards can be scary if your card is stolen because the fraud will immediately take the money out of your account. However, many debit cards like Visa or MasterCard are beginning to provide more fraud protection to their users, just like the credit card. The Electronic Fund Transfer Act gives debit cards the same protection as a credit card, but the catch is that they only have 48 hours to report the fraud to receive the fraud liability protection.
After 48 hours, the card user's liability will rise to $500 and after 60 days there is no limit. Unlike Credit Cards under the Fair Credit Billing Act, Debit cards have a much harder time disputing unauthorized purchases or purchases of goods that are damaged or lost during shipping.
This is because debit cards do not have the luxury of reversing a payment unless the merchant they purchased from is willing to help them. Debit card theft victims also do not get their refund until after the investigation is finished.
People like using a debit card to get cash back at a grocery store or to eliminate the risk of debt by automatically drawing money the user has in the bank account. Impulse buyers may favor using a debit card more because they can only use money that they already have for purchases unlike the credit card that allows you to make a purchase based off of debt. Debit cards may not have benefits like credit cards because debit cards are not charged interest. In fact, debit cards do not have APR because you are not borrowing money on credit. A downside is that debit cards do not help build your credit score.
Recap
Credit Cards are a good option if you
are responsible
pay all of your credit card bills on time
want rewards for purchasing items
want to build up your credit score
Have limited liability for fraud
Cons are
Fees like annual, late payment, foreign transaction, balance transfer, cash advance, ect.
Interest on balances are carried after a bill’s due date
Debit Cards are a good option if you
If you want easy access to cash at an ATM
get cash back at a store
only spend money that you have
Don't want interest rates for missed payments
Cons are
the possibility of having full liability for fraud
Fees: monthly, overdraft, ATM, foreign transaction
Won't help build your credit
Can only buy items with the money that you have in a bank
Can get overdraft fee charges from your bank if you don’t have enough money to pay for the total
For both cards, check to see if your provider has a zero-liability protection. Ok well that is all that I have for you today for this topic, feel free to send me an email at rethinkinghowyoumoney101@gmail.com to let me know of any other topics you would like covered, until next time- keep saving money.
-Dominique Mohler
DISCLAIMER: I am not a financial advisor, this is information I have learned from my own experiences and research.
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