The main difference between credit cards and debit cards is simple. Credit cards allow you to spend money you don’t have. Debit cards only let you spend money that is already in your account.
Credit cards are in essence short-term loans from a credit card company, with no interest charged if paid in full every month, but with very high rates if you carry a balance. By contrast, debit cards are effectively another form of a check, withdrawing money from the account to which it is linked.
In that case, are debit cards superior? Not really. Both have advantages and disadvantages. Some of the differences in these cards (and how they are used) are discussed below:
- Spending Habits – Many debit card users claim that debit cards keep them from overspending, because they realize there's a limit in their account. Credit cards have a limit, too (albeit much higher) and there is no reason credit cards can't be used in the same responsible fashion – don't charge more than you can spend and pay it off at the end of the month in full. However, if the psychology of a debit card helps you out, stick with what works for you.
- Rewards and Perks – Credit cards usually come with some sort of perk – cash-back, airline miles, merchandise rewards, or some other benefit. Debit cards can come with similar rewards, but rewards are more prevalent with credit cards.
Of course, with debit cards, you never have to worry about interest payments on a balance that could neutralize your benefits (again, the key is spending habits). Vendors may also offer discounts for using debit cards, since they don't have to pay a fee to the card processing company for each transaction.
- Security and Fraud – If your credit card is stolen and used fraudulently, you are responsible for only $50 of the charges by Federal law. With a debit card, you must report it to the bank as soon as possible to avoid liability. You're still limited to $50 if you notify the bank within two business days and $500 if the bank is notified within 60 days; otherwise, you are responsible for all charges.
Time works against debit cards in another way – reimbursement. Generally, if you contact the credit card company about a fraudulent charge, the issue can be quickly resolved and the charge removed from your account. In the case of a debit card, it will take the bank time to investigate the issue and return the money to your account, possibly several weeks. If you needed that money to pay bills, you are out of luck.
Both systems are susceptible to theft. Debit cards currently require a PIN (Personal Identification Number), giving a little extra security, but PIN and microchip technology is targeted for introduction into American credit and debit cards in late 2015.
Any security system can be defeated if you are sloppy with your information – falling for phishing e-mails for example – but overall, there should be no security difference between credit and debit cards by 2015, and there's not much difference now.
- Usability – Credit cards are not always accepted, especially for small charges, but it's rare that a debit card is rejected. Vendors prefer debit cards to avoid the fee for each credit card transaction.
- Credit History – Using a debit card exclusively gives you no credit history, making car loans and mortgages difficult to acquire because the lender cannot assess your risk level. Using a credit card establishes your credit history, for better or for worse.
Whether you have credit cards, debit cards, or both, it's important to follow a few simple rules. Keep track of how much you spend and check your account frequently for questionable charges, be vigilant about scams and guard your personal information carefully, and for credit cards, avoid charging more than you can pay off each month. If you follow these guidelines, you should have limited trouble with any card you use, either credit or debit.
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