Debit cards and credit cards look the same and tend to operate in a similar fashion from the consumer’s perspective. Yet they operate very differently behind the scene, which is why it can be confusing when you begin to realize there are stark differences between how these cards function, and how they help or hurt you financially.
There are some very important differences between credit and debit cards and understanding these differences will help you manage them appropriately.
Debit Card Basics
Most debit cards come with a Visa logo which makes them appear to act like a credit card. However, a debit card is directly linked to your checking account, rather than a line of credit. If you qualify for a checking account, the debit card is a benefit that does not require any additional qualifications or costs. Debit cards contain both a purchase and an ATM feature. Signed purchases are run through the Visa system and PIN purchases or ATM transactions are run through the ATM system. Regardless of which system is used, the funds are deducted from your account.
The ATM system generally charges the retail company less for the transaction but does not give you the increased coverage for fraud that a signature purchase does. To make a debit purchase with a signature, instead of entering your PIN number, hit cancel and most systems will allow you to sign. The ATM feature also allows you to get cash back with a purchase or access cash at any ATM. Using your banks’ ATM will provide account access at no charge whereas using a ‘foreign’ ATM (any ATM that is not connected with your bank) will result in fees averaging about $5 per transaction. Both banks typically charge a fee when you use a ‘foreign’ ATM.
Multiple accounts (checking, savings) may be connected to your debit card for ATM access. This feature allows you to transfer funds, view balances and conduct other bank business through the ATM instead of at the branch or online. Only one account can be the primary account for VISA purchases, which must be a checking account, because of withdrawal restrictions that come with savings accounts.
Prepaid debit cards are not attached to a dedicated checking account but provide similar features of a debit card. You load the card much like you would make deposits into a checking account. Prepaid cards are easier to obtain because you do not need to qualify for an account. However, they come with higher fees than a traditional bank account and may charge for both purchases and ATM withdrawals.
Debit holds can result in bank fees if transactions are not monitored. Initially, a purchase generally results in a hold that will post to the account up to three business days later. When hold amounts and posted transaction amounts differ, it can result in an overdraft on the account. Gas and restaurant purchases are the most common ‘debits’ that will hold and post different amounts. Some smaller businesses do not place a hold but will post the transaction a few business days later. If you ‘forget’ about the purchase it can also result in going over the available balance on your checking account. Delays can also occur for returned items or disputed charges. It may take several days for a return credit to post to the account and up to two weeks for a disputed charge to be reimbursed.
NOTE: Rental car agencies and some companies that require security deposits may not accept debit cards.
Key Features of the Debit Card
- Linked to checking account
- Use your own funds
- Not reported to credit bureaus
- May sign or use PIN number for purchases
- Overdrafts can occur if spending is not tracked
- Access to funds through ATM is free when using your bank
- Fees for using alternative ATMs will usually result in fees from both banks
- Banks give you a daily limit of how much may be withdrawn through the ATM
Credit Card Basics
Credit Cards come in two basic forms; secured or unsecured. Each card will have a specific limit based on your current credit record. Over time, limits may be raised or lowered based on spending and repayment habits. Once positive payment history is established, your score will improve qualifying you for better rates and terms.
Qualifying for a credit card requires established credit or a security deposit. Your credit score and stated income are the two primary pieces of information used to qualify for a credit card. When reestablishing credit after experiencing credit challenges, a secured credit card or high interest, high fee card may be required. Keeping balances low and paying the card off each month will help reestablish credit.
Credit history is helped or hurt based on repayment. Each month the credit bureau reports any payments, credit balances, and limits to the credit bureaus. Typically, payments are not reported until they are 30 days late. Any negative information remains on the credit report for seven years, however, late payments carry less weight over time, allowing you to recover once accounts are paid off.
Secured credit cards do not require qualification. You can put a deposit into a savings account with the issuer and the credit limit is generally equal to the deposit. After six months or more of on time payments, the issuer may raise your credit limit without requiring an additional deposit or offer an unsecured card. Fees and interest rates for secured cards can be high and you are better off getting one with low fees and a high interest rate, then paying the balance in full each month. The idea behind a secured credit card is to establish or reestablish credit, not add additional debt.
Unsecured cards are offered for middle to high credit scores. Some companies specialize in customers looking to rebuild credit while others specialize in those with excellent credit. When your credit has had setbacks you may be required to pay an annual fee and/or a high interest rates to obtain an unsecured card. Wise use of any new credit will help your score improve.
Key Features of the Credit Card
- Using a credit card is borrowing money from the card issuer
- Account activity including payment amount, credit limit, and any late payments within 7 years are reported to the credit bureaus
- Annual fees and interest rates will vary depending on the type of card, card benefits, and qualification of the applicant
- Higher credit scores result in lower interest and better terms
- Cash advances give you access to a cash portion of your line of credit but typically comes with a higher interest rate than purchases
Credit cards and debit cards both provide a convenient way to manage funds. While debit card use will not help you reestablish your credit, it can be an effective way to budget and manage income.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website here http://timberlinefinancial.com/contact-us/.