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nailpolishfanatic's avatar

How to understand credit- and debit cards? (more info inside)

Asked by nailpolishfanatic (6617points) April 11th, 2012

I’m almost turning 18 and I have to admit that I’m not quite sure what the definition of a credit- and a debit card is.

To me a credit card is -> the card used for mostly payments. i.e, if I were to buy something from a store, I would ‘pay’ with my credit card and later I would receive a bill to my account and pay that bill straight from my bank account. This is a sort of ‘borrowing’ in that sense.

But with a debit card -> when used in payments, you pay straight from your bank account… that money that you pay with is withdrawn from your account.

That’s the way that I think of the whole credit and debit cards. Is it right… because I understand it this way. Please when you explain to me the definitions and how these things all work, could you try and make it as easily understandable as possible.
Adding to that, I’m studying business (you can call it ‘majoring in business’) so I’m expected to know this but please, no mean comments.

And I’m asking this because my parents and I were talking and I got confused on what sort of cards I own so my stepfather said to me: “you call yourself a business student, yet you don’t know the difference between credit card and debit card”. He truly hurt my feelings and most of you know that sometime back I asked a question concerning my future and that he wasn’t very supportive of what I’m doing because he thinks that I’m just learning this because that’s what my mother is currently studying at the university.

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11 Answers

digitalimpression's avatar

Credit card – spending money you don’t have.
Debit card – Like writing a check.. but digitally.

Lightlyseared's avatar

With a debit card you use your money to buy something. With a credit card you borrow money form the credit card company to buy something and then pay the credit card company.

Seaofclouds's avatar

You have the idea of it correct. To add to it, many banks make it so that you can use your debit card as a credit card as well (your bank card would have a visa or mastercard symbol on it). These cards still take money directly from your bank account, but are processed as a credit card purchase for the company you are buying from. This is beneficial when buying from a company that can not process your payment with a debit card.

It’s also important to note that credit cards charge you interest (and sometimes other fees). The amount of interest varies from card to card and depending on your credit/history with the credit card company.

Keep_on_running's avatar

Debit – good!

Credit – baaad.

tedibear's avatar

You have it right, @nailpolishfanatic. It can get confusing when the bank throws the Visa or Mastercard logo on it, but @Seaofclouds gave an excellent explanation of it. And I’m sorry your stepfather wasn’t very nice to you. Anyone can get muddled from time to time.

Lightlyseared's avatar

@Keep_on_running that’s a little too simplistic don’t you think? Buying something on a credit card gives you a lot of benefits that buying on a debit card doesn’t (at least in the UK). It makes the card providers equally liable (with the supplier) under law for any goods between £100 and £30,000, that you’ve paid for by credit card. If something turns out to be faulty you can claim the money back from your credit card provider who will then reclaim the money from the supplier. You can even claim back extra costs incurred as a result of the problem. So for example in the UK there was a bit of scandal with faulty breast implants. Women who paid for the surgery with their credit card can reclaim the cost of the surgery and the credit card company will pay for the surgery to remove the faulty implant.

dabbler's avatar

Nothin’ wrong with a “credit card”, just pay it off completely every month.
Debt—baaaad !

Buttonstc's avatar

Just keep in mind that any debit cards you use are more vulnerable than credit cards if someone should use your card number fraudulently so you should definitely keep it clear in your mind which is which.

As an example: someone using your debit card fraudulently, could clean out the all the funds in the account to which it is tied. If you report it promptly, most (but not ALL banks) will make you liable for only the first $50.00 dollars and refund the rest. But thats a major hassle and usually takes months. You need to study the specific details and terms outlined by the bank connected to the card. Study ALL of the conditions thoroughly for each debit card you have.

With credit cards, fraudulent activity is still a bit of a hassle but in this case its the banks money which is stolen and doesn’t leave you with your bank account drained. At the worst, it will take them a while to refund your balance due for any interest charged to you on the fraudulent amounts. Thats a whole lot different from cash out of your own pocket via your checking account.

To me that is the primary significant difference between debit cards vs. credit cards. Granted,being the victim of fraud is not an everyday thing in a persons life, but it can be far more financially devastating if it happens to your debit card than to your credit card.

I would never consider using a debit card to make online purchases since I have far less control over who has or doesn’t have access to that card number. And I’m very cautious where i use it in the real world also. But unless some crooked employee or shady owner/manager has managed to attach a sophisticated card skimmer to the machine through which I swipe the card, its safe. I’m not as concerned about shopping at a major grocery store but I never hand over my card to a restaurant employee where it will be out of my sight.

abysmalbeauty's avatar

@nailpolishfanatic you have the concept correct. Let me provide you with a little more detail.

Debit cards are linked to your banking account and will debit the funds directly from them. A basic debit card requires a pin number in order to make the purchase and funds are transmitted directly from your bank by the next day at the latest. Debit cards with visa/mastercard logos can also be used for point of sale purchases which means that the merchant receives and authorization which then is processed through visa or mastercard to collect the funds. Because of this processing difference the purchase amount can take longer (up to 60 days or more but usually within 3 days) to be removed from your bank account because the merchant has to submit the transaction in a batch via their merchant services provider. (the company who processes their credit card transactions.)

A credit card usually relies on borrowed money based on a specific dollar amount (credit limit) that a creditor has authorized you to borrow. It is billed monthly and if you do not pay the full amount you will be charged a % of what you have borrowed as a service fee. You can also borrow cash from a credit card called a cash advance and there is normally a higher fee for this type of transaction. There are some credit cards that are actually supported by your own money, this is called a secured credit card. These type of cards are generally owned by people who have not established any credit or who have poor credit and are intended to help the owner build their credit rating. The borrow would provide the creditor with a certain amount of money and that would be the credit limit for that card. This prevents the card holder from defaulting on the borrowed money. If the card is closed and the balance paid in full the money is returned to the card holder.

Besides the obvious difference of your own money compared to borrowed money one other big difference between the two is that debit cards have absolutely no impact to your credit score or credit history. Credit cards do which is why many people see them as either good or bad. If managed correctly a credit card is very good for you as it helps to reinforce that you are someone who is responsible and trustworthy with borrowing funds which will help you to one day obtain a mortgage, or student loans, or auto loans etc.

Most debit and credit cards provide 0% liability for fraudulent charges these days. Credit cards generally provide better perks such as points, air miles, cash back, and other benefits for card holders where as most debit cards do not offer these features. It is beneficial to have a debit card with a visa/mastercard logo or a credit card when travelling overseas as many ATMs have a low cash withdrawal limit and have strict PIN number requirements to work outside of the US.

I hope this information helps you to have a clear understanding of the difference between a credit card and a debit card.

JLeslie's avatar

Choose a credit card. A debit card does nothing, zero, for your credit score. When using a credit card you will have the option to pay a small amount of what you owe, or you can pay the whole thing off. Always pay it off at the end of the month in full. Not paying in full is like throwing money on the street, because of the interest charged. If you cannot be responsible enough to only soend what you can afford to pay off then yes, go with the debit card, you can’t be trusted with credit.

You should be able to get a credit card without any fees, no annual fee, and no fees as long as you pay on time when the bill is due.

Some credit cards have perks like money back or frequent flyer miles. I have an airline card, which actually has a high annual fee, but it works in my favor because of how much I charge and the free flights I get. And, I have a Marriott card, so I get free hotel stays. But, I charge everything. Everything. $20 can last me in my wallet for weeks.

Ease into the whole credit card thing. Start simple, and make sure having the card does not cost you any extra money.

JLeslie's avatar

Oh, and you have it right as others have said above. Credit card you “pay” with the card, but don’t receive the bill until later. Debit, you pay right out of your bank account.

Back in the day when savings earned a very good interest rate it really paid to use a credit card. You had your own money in the bank longer, you did not pay for goods until the bill came a few weeks later. I think I made a few thousand dollars in interest over the years using a credit card instead of cash. Now, not really the case because the interest rates on savings are so very low.

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