Credit vs Debit

In response to my last credit post some people wanted to know what the difference was between credit and debit. The answer is a little confusing.

A credit card is a card that is not linked to a bank account. You can charge money to the card and the credit card company sends you a bill at the end of the month. On these cards you have to be careful of your limit. It is confusing but they do not actually limit you at your limit. You can go over the limit and they will then charge you over limit fees. I have had this happen to me. For this reason I will only get a credit card that has a high limit because I do not want to be worried about hitting it. My spending varies so a low limit might be fine most of the time, but some times I will spend ten times what I normally do. Some credit cards have a yearly fee for having them. This is most common with mileage cards, so you need to think if the fee justifies you getting the card.

On a credit card you have to pay the minimum balance on your bill or you will be charged a late free. In addition to the late fee you will be charged interest if you only pay the minimum. For this reason it is wise to pay the bill off in full. That way you don’t have to worry about interest or fees.

A debit card is linked to a bank account. When you purchase something the money is taken out of your bank account. You would think this would mean you could only spend what you have but it doesn’t. You bank will allow you to make your account go negative and they will charge you fees for doing this as well, so watch your balance.

Most debit cards can also be swiped as a credit card. By this I mean you can press the credit button when you checkout and it will still go though. It still works almost the same though, taking the money out of your account. By swiping it as a credit card you have to sign for purchases instead of entering a pin when it done as debit.

Swiping your debit card as credit has some advantages. Some debit cards offer you rewards like credit cards do. The only way to get the rewards is when you swipe it as credit since then the stores get charged a fee. There is virtually no fee when swiped as debit.

Also all cards swiped as credit have more security. Charges done as credit can be disputed with the bank if they are wrong, while debit purchases can not be disputed. A debit card allows you to get cash back most of the time, so you don’t have to go to an ATM to get cash. This is extremely useful if your banks ATM is not near by and you would be forced to pay a fee at another banks ATM. There is no fee for getting cash while using a debit card.

It costs retail stores money to accept anything swiped as a credit card. The stores usually have to pay 2-3% of the price of your purchase as a fee. This is why some places do not accept credit cards or only accept debit cards. Through this fee the credit card company makes money and it also allows them to give you rewards for purchasing stuff.