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“Will that be debit or credit?” can be a confusing question to anyone who is accustomed to simply handing a credit card to the clerk, signing the receipt or writing out a check, producing identification and walking out with the purchase. Lack of understanding about the advantages and disadvantages of using a debit vs. a credit card is often the cause of the confusion. Here's the information you need to make an educated decision at the register.
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. They pay the debt to the merchant. You are then obligated to pay the money back to the lender or bank. In the terms of your agreement with the lender, you promise to pay back the money with interest. When using a credit card, you need to 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 you 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. Debit cards provide instant access to your own money. Issued by banks and with most automatic teller machines (ATMs) programmed to accept them, debit cards are accepted worldwide. To use a debit card, the card is swiped 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 still 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 it's not actually adding any debt. So . . . Which One to Choose!
Safety Concerns
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 you 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 $50, if 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 you actually 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, for example, 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 them work for you.
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About the Author: Noreen Ruth is a writer specializing in credit card and financial information, she has extensive knowledge and experience writing articles that help consumers use credit to their best advantage.
Research comparisons of the best credit card deals and apply online. Fill out applications for Visa, MasterCard, American Express, and Discover. Find the best credit card deal for your specific financial needs - 0%, air miles, instant approval prepaid debit cards and reward cards.
Article Source: ArticlesBase.com - Will that be Debit or Credit?
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