Credit Card Vs. Debit Card - What Are The Main Differences?

Posted by Nick Niesen on October 29th, 2010

What is a Debit Card?
The card you use at the ATM is known as a debit card. When debit cards first appeared it was easy to tell them apart from credit cards. Debit cards didn?t have a credit card company logo on them; instead, they usually just had your bank name, your account number and your name.

Today debit cards look exactly like credit cards even carrying the same logos. Both types of cards can be swiped at the checkout counter , used to make purchases on the internet, or to pay for the fill-up at the gas pump. When you use your debit card to make a purchase, it?s just like using cash. The account that is attached to your debit card, in most cases your checking account, is automatically debited when you use your debit card. The cost of your purchase is deducted from the funds you have in that account. In the case of a credit card, you can pay just 5% of your bill amount and carry forward the balance to be paid the next time. You do not have to settle all in one go. This is referred to as revolving credit.

What is a Credit Card?
On the other hand, when you use your credit card to make a purchase you are using someone?s else?s money, specifically the issuer of the credit card, usually a banking institution.

In effect, you agree to pay them back the money you borrowed to make your purchase. In addition you will also pay interest on the money ?loaned? to you at the rate which you agreed to when you applied for their credit card. This is known as the annual percentage rate (APR). While the two cards might act and look alike, the levels of consumer protection that each type of card provides can be different.

Credit Cards offer Better Protection!
Under federal law, if someone steals your credit card you're only responsible to pay the first $50 of unauthorized charges. However, if you notify the credit card issuer before a thief is able to make any charges you may be free from all liability. If the credit card is not physically present when an unauthorized or fraudulent purchase is made, such as over the internet, you?re also free from liability for those charges.

MasterCard and Visa offer zero-liability protection where you won?t pay any charges if someone uses your credit card to make an unauthorized purchase.
The protection offered to debit card fraud is similar but with a few exceptions. For example, your liability under federal law is limited to $50, the same as for a credit card, but only if you notify the issuer within two business days of discovering the card's loss or theft. Your liability for debit card fraud can jump up to $500 if you don?t report the loss or theft within two business days. And if you are the type of person that gives a passing glance to your monthly bank statement, you could be totally liable for any fraudulent debit card charges if you wait 60 days or more from the time your statement is mailed. Visa and MasterCard zero-liability protection applies to your debit card but only for transactions that do not involve the use of your PIN (personal identification number).

Additional protection against fraudulent use of your credit or debit cards may be available through your homeowner?s or renter?s insurance. Check your policy or with your agent for more information about your coverage.

Also be aware that you should contact your card issuer by certified letter, return receipt requested, after you?ve contacted them by phone to protect your consumer rights.

As for which card to use for what type of purchase, most experts agree that you should use your debit card for the same type of purchases you?d make as if you were using cash. Therefore, it makes more sense to use your debit card than your credit card at the grocery store or gas station (provided you have sufficient funds to cover these purchases of course).

Credit Card Purchase Disputes
You should avoid using your debit card for any online purchase or for something which is expensive. Why? The main reason is that it is much easier to dispute a charge when you use your credit card. Your credit card company will remove the charge until the problem is resolved.

With your debit card you are stuck dealing with the merchant directly to
resolve any problems with a purchase. The merchant establishment will have a debit terminal. When you give your card to make the payment, the card will be swiped. The moment it is done, an electronic message is sent to the bank which checks to see if the customer has that much money in his/her account. A credit card requires the bank to make a payment to the merchant establishment (online shop, hotel or wherever you spend money using your card). The cardholder has to settle the bill later.