Debit Cards vs Credit Cards

These both offer access to purchase power without cash or checkbook.

Two Basic Types

Credit Cards – are a line of credit, an amount that someone, usually a bank or a credit union, is willing to lend to you. As you make additional charges the available credit is reduced. As you make payments the available credit is increased. In general the credit is not linked to any other account. How much credit you can get depends on terms from the credit card provider and your credit history. Use, or abuse, of credit cards affects your credit history. Because use of a credit card is not a use of cash some people are unaware of their spending … until the bill comes due.

Debit Cards – are another way to access your checking or savings account. The limit of what you can spend is the total in that account (unless you overdraft, see Fees below). A debit card isn’t credit and does not affect your credit history. Overdrawing the underlying checking or savings account certainly will!

Billing & Interest & Fees

With credit cards you get bills for the charges you’ve made. With debit cards the charges already came out of the associated checking or savings account and there is no separate bill. Because debit cards are not loans there is no interest. Credit cards, if not paid on time, can generate interest charges.

Fees can be charged for both types of card. Credit cards, especially the well advertised versions such as Silver, Gold, Platinum, Diamond, etc., can carry annual fees. Debit cards are generally have low or no cost for use, but may charge fees (sometimes rather high) for overdrawing (also called overdrafting) your underlying account. This may, or may not, be a fee for the debit card itself, but a fee that could be generated by writing a check.

Security & Protections & Liability

The security features to prevent improper use of debit and credit cards are varied and could certainly be improved. The big difference between debit and credit cards are how consumers are protected when those features fail.

Credit card users enjoy superior protection. If they notice fraud and make prompt (generally within 30 days of the event or right after the statement is received) then their liability could be zero or a low maximum, generally $50. No money was removed from your account, charges consume your line of credit. Even cash advances from a credit card are not cash removed from you.

Debit card users have lesser protection. The money has already been taken from your account. Even if you make prompt notification reimbursement is not rapid or even guaranteed. Debit card users can wind up being liable for all the fraudulent use of their debit card.

Merchant Acceptance

Most merchants accept both debit and credit cards and greatly prefer debit cards. Why? Merchants pay a fee for charge card (either kind) processing. It comes out of their pocket, but gets built into your bill as part of the merchant’s overhead. This is why cash customers are in a position to negotiate discounts because the merchant makes more profit with cash. In general, debit card processing fees are lower than credit card processing fees.

Consumer Incentives

Credit cards are heavy with incentives such as points for air travel or simply a rebate equal to some percentage of your purchases. Incentives on debit cards are less glamorous, but can be financially rewarding including fee waivers on the underlying checking account if the debit card is used so many times per month,

Because these incentives change over time some people try to game the system by churning, that is applying for the most advantageous card (generally credit) at the time then using it until the next better deal comes along. See Reddit

Some providers are getting wise to the trend and trying to stop, or at least reduce, it.

Instead of getting one card after another some people use loopholes. For example: Long time ago the purchase of American Express Traveler’s Checks with a credit card was considered a “purchase”, not a “cash advance”. You could purchase them (often without fee if you were a member of an organization such as the American Automobile Association), go right to the bank and deposit them. Rack up thousands of “points” as well as interest on the deposit until the bill came due. Players didn’t prosper much. At that time points were pretty well useless. Items for “sale” with “points” were often cheaper elsewhere and without the effort. If only we’d had cash back at the time.

Dual Use Cards – Caution

Some cards are dual use, that is they can access a line of credit like credit cards or access your checking or savings accounts like debit cards. Know which function is being used.

Rules & Regulations

For credit card users the rules are delineated in the agreement. That was the piece of paper with the very small type. In general credit card users are not responsible for fraudulent charges as long as you notify the provider (the bank that provided your charge card) quickly after receiving your statement. “Quickly” is defined differently between agreements.

For debit card users there are also agreements and the Electronic Funds Transfer Act, 1978 (summarized at WikiPedia) which establishes the rights and liabilities of consumers for electronic funds transfer activities. Implementation was via the Federal Reserve in Regulation E. Section 205.3 Coverage describes the types of transactions covered which include point-of-sale (POS) and automatic (or automated) teller machines (ATM) transfers initiated through a debit card transaction.

For consumers loss is limited to $50 if institution is notified within two business days. Loss could be up to $500 if institution is notified between 3 and 59 days If loss is not reported within 60 business days customer risks unlimited loss on transfers made after the 60 day period – could lose all money in account plus maximum over draft if any. The problem is that few consumers check their accounts every two days.

Some have referred to Regulation Z which applies to “Truth in Lending”, that is “credit”. Debit cards are not debt instruments and it appears that Regulation Z does not apply.


Like any tool charge cards and debit cards can be used or abused. Used properly they can greatly simplify your financial operations. Abused, by you or some crook, and complications arise.

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