Bank-issued debit and credit cards are used every day, and have become common in shopping and paying bills. Credit cards were introduced in the 1950s, while debit cards came out in the mid-1970s. By 2006, there were more than 984 million bank-issued Visa and MasterCard credit and debit cards in the United States. Debit and credit cards may look the same, but there are major differences in how they work.
Credit cards are attached to a bank-issued line of credit. Every time a charge is made, the amount of available credit decreases, and your balance increases. Interest is charged if a balance is carried, and the bank will bill you for a minimum payment. You can spend more money than you actually have by using credit cards, but their use offers some protections, and they can help build credit if used wisely.
Debit cards are bank-issued cards that are attached to your savings or checking account. They look like credit cards and are accepted in stores and online. Each transaction using the debit card will decrease the balance in the bank account it is tied to. Unlike credit cards, debit cards typically require a PIN (personal identification number) when used in electronic machines. Debit cards do not help build credit.
Video of the Day
Disadvantages of Credit Cards
Credit cards may encourage "impulse buying." Unchecked use of a credit card can endanger your credit score and finances. Banks make money by charging high rates of interest on credit card balances, annual and over-the-limit fees, late charges and cash-transaction fees. If a credit card is stolen, the thief can easily make online or phone purchases.
Disadvantages of Debit Cards
Debit card users must keep up with their bank account balances. It is easy to use the debit card, forget to record the amount in a journal and later find that there was not enough money in the account to cover the expenditure. Purchasing something with a debit card is like spending cash. If there is a dispute, the merchant already has your money, so it may be harder to resolve.
You have protection from federal law if you dispute something on a credit card. The Fair Credit Billing Act relieves you of liability for fraudulent charges or undelivered or low-quality goods. You have less protection in the case of a problem with your debit card. If your debit card is stolen, the Electronic Fund Transfer Act allows for a $50 cap on unauthorized use of missing or stolen debit cards if you report the loss or theft to your bank within two days of the transaction date.