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Both Sides of the Card: Understanding Credit and Debit Cards

Debit or credit?

Each time you brandish your plastic purchasing pal, you encounter the question. Is there a right or wrong answer?

Not exactly. But here’s a look at the differences to help you decide what makes sense for you.

The Basic Difference

Credit and debit cards have similar logos, magnetic strips, encryption chips, and they’re generally accepted in all the same places. So what gives?

Credit cards attach to a line of credit. They work somewhat like a loan. When you make a purchase, the credit line decreases and your balance increases. If you pay the entire balance off by the due date, you don’t pay any interest. If you don’t, you get charged interest. The annual percentage rate (APR) varies, depending on your card.

Debit cards attach directly to your checking or savings account. They work like cash. When you make a purchase, the money gets withdrawn immediately and decreases the balance in your account. There is no payment to make and no interest charged.

Pros, Cons and Things that Make You Go “Hmmm...”

Following are the benefits and things to be aware of with credit cards and debit cards.

The Good Things About Credit Cards

  • You build a credit history.
  • Some cards reward points for travel, cash back, goods and other incentives.
  • You can make purchases when you don’t have enough cash in your account (which can be helpful for emergencies).
  • There is usually a grace period of about 25 days to pay off your debt in full without incurring any interest charges.
  • Credit cards can protect you from fraudulent charges, low-quality goods and goods you never received.
  • You can sometimes get “no interest” or “low interest” promotions for a specified period of time.
  • They sometimes include some insurance protection, such as travel accident insurance, insurance coverage for rental cars and other perks.

 Things to be Aware of with Credit Cards

  • It can be easy to rack up debt.
  • The interest can add up and create a financial burden.
  • Making payments can be challenging if you’re short on cash. And it can take years to pay off the debt, especially if you only make the minimum payment.
  • Late payments harm your credit.
  • When you max out your limit, it can be tough to pay off and it can have a negative impact on your credit report.
  • Some merchants charge more for credit card purchases (because they pay a higher fee than they do for debit cards).
  • Credit cards often charge annual fees.

The Good Things About Debit Cards

  • Debit cards work like cash, so you don’t accrue debt.
  • You don’t make any monthly payments.
  • You don’t pay interest.
  • There are no annual fees.
  • When used in machines, they require a Personal Identification Number (PIN), which can prevent a thief from making purchases.
  • You can often opt to get cash back when you make a purchase.
  • Debit cards have a $50 cap on unauthorized use if you report the card missing or stolen within two days of the transaction.

 Things to be Aware of with Debit Cards

  • You might not have enough money in your account to make a purchase.
  • Merchants put a hold on your money when you make a purchase. In cases where it’s a refundable deposit, the money is frozen and unavailable until the merchant releases it, which can take time.
  • It’s possible to become overdrawn (in the same way as writing checks beyond your account’s balance).
  • You must report your card being missing or stolen within two days of a fraudulent transaction in order to benefit from the $50 cap from unauthorized use. (If you aren’t monitoring your account, this could mean you inadvertently picked up the tab for a thief.)
  • If you have a dispute, it can be more challenging to resolve because the merchant has your money.
  • Debit cards do not help to build a credit history.
  • If a thief gains access, your account can be drained and it can take some time to sort it out.

 Things that Make You Go “Hmmm...”

 Debit cards can sometimes function like credit cards. In other words, you can select the “credit” option and sign for your purchase without entering your PIN number. Just be aware:

  • You may or may not receive the same protection as a credit card.
  • Using your debit card as a credit card does not automatically create a line of credit.

Smart Practices for Credit and Debit Cards

When reaching for your credit or debit card, consider the following best practices.

  • Pay with a debit card when you can, to avoid the accumulation of debt. (Just be sure your purchase won’t leave you short on cash for monthly bills and other necessary expenses.)
  • Consider your credit card an ally for emergencies, purchases you need when you’re short on cash and to build credit.
  • Monitor your transactions closely. This will help you to:
    • spot unauthorized transactions
    • prevent exceeding your credit limit or checking/savings account balance
    • heighten awareness about your spending habits (e.g., “Ee-gads, that’s a lotta lattes!”)
  • Do your best not to max out your credit card.
  • Try to pay your credit card balance off every month (on time). This will:
    • build good credit
    • prevent any interest charges
    • prevent late-payment charges.
  • If you can’t pay off your entire credit card balance, do your best to pay more than the monthly minimum.
  • When withdrawing cash with your debit card, take advantage of our credit union’s network of nearly 30,000 fee-free ATMs. Why pay to get your own money?!

Both credit and debit cards play an important role in your financial world. Used properly, they make life convenient and establish a solid credit history.

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