What is Credit?
Every time you present a credit card for payment, you are actually borrowing money made available to you by a bank or other lender. The lender pays the debt to the merchant. You are then obligated to pay the money back to the lender. In the agreement between yourself and the lender, you promise to pay back the money with interest. When using a credit card you must be aware of the credit limit that you've been granted by the lender and be sure to stay under that limit. There are hefty fees if your go over your limit!
What is Debit?
Unlike a credit transaction, a debit purchase is not a loan but, in a sense, an electronic check with the purchase being paid directly from your own funds in a bank account. Cash or checks are no longer necessary.There is no need to carry cash or checks. Debit cards provide instant access to your own money. Issued by banks with most automatic teller machines (ATMs) programmed to accept them, debit cards are accepted worldwide. To use a debit card, the card is swipped and you enter a secret 4 digit personal identification number (pin) to confirm the transaction. When using a debit card is it absolutely essential that you register all of your transactions into your checkbook. There are hefty fees when you overdraw from your account.
When Using a Debit Card as a Credit Card
The funds to cover your purchase must be available in your bank account even when you use your debit card as a credit card. In this case, after the card is swiped you will have to sign the receipt. The big difference is that the money exchange process goes through the institution that backs the card, i.e., MasterCard, Visa, etc. which will be included in your credit history. This is a great idea, if you're struggling to get your credit score up as its not actually adding any debt.
So . . . Which One to Choose!
Safety
Debit Cards - The features that make using a debit card more convenient (immediate access to cash, no photo ID required) make it more vulnerable to fraud. Theft of your debit card can quickly empty your bank account, unless reported quickly. Your liability is $50 if your report the loss within 2 days of fraudulent activity and as much as $500 if you report later then that.
Credit Cards - Credit cards on the other hand are held to strict liability laws that limit a consumer's responsibility to the first $50if suspicious activity is reported within 60 days.
Payment Options
Debit Cards - The funds for all purchases must be in the bank account. This is actually a great way to manage your budget as you will only be spending money that your have and not borrowing against your future income.
Credit Cards - More expensive purchases can be paid off over a period of time. This is especially helpful if you have an essential major appliance fail, such as your hot water heater, and you don't have the available cash.
Your Credit History and Score
Debit Cards - Your purchases are not recorded by the three credit reporting agencies and therefore, do not reflect any activity on your credit score or history.
Credit Cards - All purchases are reported to the three credit bureaus on a monthly basis and included in your credit history This can help you to establish or repair your credit score.
Additional Benefits
Credit Cards - Purchases made with some credit cards offer additional insurance and extended warranties. Be sure to read your credit card agreement for details.
Whichever way you choose to manage your finances, both credit and debit cards offer advantages. Your financial future depends on understanding those advantages and making sure they work for you.
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