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Have you heard people talk about credit and debit cards almost interchangeably? You know they are types of cards used to make purchases with but aren’t sure what the difference is. You aren’t alone, and having a solid understanding of both is important before you apply for either.
The Basics of Debit Cards and Credit Cards
Before you sign any card offers, you should know what kind of card you are signing up for, and which is right for you.
What is a debit card?
Debit cards are linked to your checking account and draw money directly from your bank when you use it. You don’t pay a monthly bill, but instead will receive a summary of your spending each month from your bank. If you spend more than you have in your checking account, you may either be declined or charged an overdraft fee.
ATM cards, once a popular stand-alone offering by banks, are now often included in debit card offerings. If you use your debit card at an ATM you will be required to enter your four-digit PIN as a security measure. Some merchants may also require your PIN to complete a transaction.
What is a credit card?
A credit card lets you borrow money to make purchases, rather than directly drawing from your bank account like a debit card. The card issuer will offer you a line of credit, which is the maximum amount you can borrow each payment cycle. Each month you will get a bill summarizing your purchases from the previous billing cycle that you will need to repay.
If you do not pay off the total amount on your bill every month, you will be charged interest on the remaining balance that carries over month to month until it is repaid. This is what’s known as ‘revolving credit’. Unlike a debit card, a credit card may impact your credit score and future borrowing terms.
What’s the Difference Between Debit and Credit Cards?
While both card options will help you make purchases without carrying around a stack of cash, there are some key differences between the two.
Some users see debit cards as using “real” money, because you are directly pulling funds from your checking account each time you make a purchase, instead of paying a bill at the end of the month and carrying a balance with a credit card. For this reason, debit cards can be a great budgeting tool.
Credit cards, however, can be a long-term tool to help build a strong credit history. If you are planning on taking out a loan in the future, your credit history will help the lender decide what rates you qualify for. However, this can be a catch 22. If you don’t make full and timely payments on your credit card bill, you could negatively impact your credit history. A debit card does not play a role in your credit history.
Should I Use a Debit Card or a Credit Card?
Deciding when to use a debit card over a credit card depends on your personal spending habits. If you have trouble sticking to a budget, a debit card could help you stay within a fixed spending limit. If you have good spending habits and are looking to build a strong credit history, a credit card might be the better option.
If you don’t know where to start; a potential solution is to use a credit card sparingly and ensure you make your payments on time. However, sometimes vendors will only accept either debit or credit cards, so you might not have a choice.
Keeping Your Cards Secure
Either card option comes with the risk of theft, and the larger risk of identity theft. If your card is missing, or if your information has been compromised you will want to alert your bank and card issuer ASAP. You should also be proactive about protecting your card and personal information.
How to keep your debit card secure
Check your statements each month to make sure that all of the charges are ones that you made. This is also a helpful way to stay accountable to your budget. If any charges are not your own, call your card issuer and bank immediately.
When an option, only use ATMs in a bank. Unsecured or public ATMs are at a higher risk of having “skimming” devices attached. “Skimming” devices are used to steal your card and PIN information. It is also common etiquette to stand back and give some distance if someone else is using an ATM. If someone is standing too close, ask them to back up or consider asking if they want to go first.
Stolen or compromised debit cards are protected by the Electronic Fund Transfer Act, which protects an authorized user from being held accountable for unauthorized transactions if the card is reported as stolen or compromised before it is used by the thief. Your bank might offer further protections in the case of theft or other compromised information.
How to keep your credit card secure
Similar to a debit card, you should set aside time each month to review your credit card bill before making a payment. Any strange, unfamiliar, or unrecognized purchases should be reported to the issuer before a payment is made.
Don’t use your card for online purchases on public or unsecured wifi networks. If your lender offers an app for tracking your card purchases, you might consider signing up to receive alerts for when the card is used. This could give you a quick alert to any purchases that you didn’t authorize.
Credit card holders are protected from unauthorized spending by the Fair Credit Billing Act. If your card is used before you report it as stolen, the most you can be changed is $50 for any purchases made. If your credit card is stolen or compromised, contact your lender and card issuer to cancel the card and confirm any recent spending activity.