Debit Cards vs. Credit Cards

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Debit and credit cards may look similar, but there are notable differences between them. While checks and ATM cards are self-explanatory, many customers do not understand the difference between credit cards and debit cards. The two types of cards have different features and offer different levels of customer protection.

Statistics indicate that debit cards are more popular than credit cards. A recent Consumer Credit Card Program Study conducted by TNS Financial Services showed that more than 60% of people use debit cards instead of credit cards because debit cards feel more like "real money.” The study reported that the number of households using debit cards grew from 47% to 60% between 2002 and 2005. Another study conducted by the American Bankers Association and Dove Consulting indicates that debit card transactions make up the same value of in-store purchases as cash. While debit card use has grown from 21% of in-store purchases since 2001, cash payments have remained at 33% of total transactions. Credit card use for in-store purchases went down by 2% from 2001 to 2005.

Increasingly more people are using debit cards when shopping online. A study published by Jupiter Research in American Banker showed that debit cards will make up 46% of all online purchases by 2010. The same study indicates that only 41% of customers were using debit cards for online purchases in 2006.

Debit cards have gained tremendous popularity in the last few years. These cards are linked to your bank account, so the money you spend is automatically taken from your account. A common reason for using debit cards is that you are spending money you actually have. There are no hidden fees or interest rates. Debit cards can limit purchases to products or services that you are able to pay for at that moment. Thus, debit cards may be suitable for customers who are carrying a debt load. If you use debit cards with overdraft protection and your account becomes overdrawn, the debit charges can be taken off your savings account. This option allows you to exceed your balance, but you will end up paying extra fees.

Using debit cards requires financial discipline. Responsible debit card users pay minimum fees for this service. Most financial groups do not charge for debit card transactions.

There are major differences between credit cards and debit cards. Consumers who have credit cards and pay their balance in full each month benefit from up to 40 days of free float. If you use your debit card for buying specific products, the money is withdrawn from your account within minutes. Your bank balance goes down with each transaction made with the debit card, so you are less likely to overspend.

Consumer protection varies when it comes to credit versus debit cards. The greatest risk of using a debit card is that you open your bank account to the world. Consumers who use credit cards can withhold payment if they are unsatisfied with the quality of a product or service. If you make a purchase using your debit card and then you realize that something is wrong with the purchase, you may not be able to cancel the transaction because the merchant already has your money.

Debit cards give you less consumer protection than credit cards. The Fair Credit Billing Act states the credit card users have zero liability for poor quality or damaged merchandise, fraudulent purchases or products that were never delivered. Consumers who use credit cards are not required to pay any amount that may be in dispute until the issue is resolved. Despite the fact that many financial groups are now providing greater protection and zero liability for debit card users, customers still don't have the same degree of protection with a debit card as they do with a credit card.

Increasingly, more companies are extending the same consumer protection to customers regardless of whether they use their credit cards or debit cards. Although both types of cards offer zero liability, unauthorized debit card use can have a major impact on your wallet. Just like interest rates and fees, the zero liability can change at any time.

If your debit card is stolen, you may only find out after the money has been withdrawn from your checking account. The Electronic Fund Transfer Act gives customers the right to dispute any error on their bank statements. Consumer liability for card charges is limited to $50 when fraud is reported within two days of discovering the card's theft or loss. You could be responsible for paying up to $500 if you report the card's loss or theft between two days and 60 days. After 60 days, you will be required to pay every cent of the unauthorized charges.

Even though increasingly more customers use debit cards, there are a number of advantages offered by credit cards. A debit card provides more limited consumer protection. This type of card may be used for buying groceries and electronics, renting a car or paying at gas stations.

Most credit cards offer rewards and cashback for buying certain products. If you are not satisfied with the merchandise purchased, you don't have to pay until the problem is solved. Credit cards offer greater protection for expensive purchases and for those made online or by phone. It is recommended to use your debit card only when paying for cash-and-carry types of purchases.

Debit cards are convenient and easy to use. The main advantage of using debit cards is that once your balance goes down to zero, you aren't able to spend. However, you will not experience the float enjoyed when making a credit card payment. If you are planning to use your debit card for large purchases, go to a store that allows you to inspect the products you are interested in. Since most debit cards carry a maximum daily spending limit, you may need to use a credit card. Another benefit of using credit cards is that they offer greater consumer protection for online purchases.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.