Saturday, 5 March 2011

Credit Card and Debit Card Difference

Credit and debit cards are both small plastic cards that look very similar to each other. Both debit and credit cards have the same numbering patterns, carry credit card company logos and typically feature the names of banks. Additionally, individuals can use these cards in much the same way to make purchases and shop online. Although credit and debit cards have many similarities, consumers should be aware of key differences between the two.

    Payment Method

  1. One major distinction between credit and debit cards is they each draw funds from a different type of account. Debit cards draw, or "debit," money from checking, saving or prepaid accounts, while credit cards take funds from lines of credit. In other words, a debit card draws from a consumer's actual money, while a financial institution loans a consumer money on credit card purchases, which he must repay later, with interest.

    Consumer and Legal Protections

  2. Debit and credit card users are subject to distinct protections under federal law. For instance, according to a January 2009 article in the "The New York Times," federal law allows credit card users to dispute unsatisfactory purchases from retailers, while no such protection exists for purchases made with debit cards. Additionally, federal laws limit consumers' liability for fraudulent credit card charges to $50, as of 2011. While debit card users have the same liability dollar limit, they may be liable for up to $500 if they wait more than 60 days to report the fraud to their banks or card issuers.


  3. Another way in which debit and credit cards differ is with respect to interest charges. Debit card purchases do not accrue interest because they draw funds directly from a consumer's checking account, meaning the purchase is complete as soon as the bank records the transaction. In contrast, purchases made with a credit card accrue interest if the cardholder does not pay them off within a specified time period, typically 15 to 45 days.

    Credit Implications

  4. A major difference between credit and debit cards is how they affect a person's credit report and FICO score. Debit cards do not affect individuals' credit reports or scores, as these cards are based on bank checking accounts, which are not credit products. On the other hand, credit cards almost always affect individuals' credit scores, either in a positive or negative fashion. For instance, a consumer who uses a credit card to make purchases and pays the balance at the end of each month will see the card raise her credit score, while an individual who carries a high balance on his card from month to month, exceeds his credit limit or defaults on his card will see his FICO score drop.


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