Credit & Debit Cards

How does a credit card work?

Credit cards are considered to be revolving lines of credit.  Lines of credit extended by the credit card issuer will vary for each individual card holder.  Once a credit line is used and repaid, the portion of the funds repaid will become available again for use.  Credit cards give you the option to pay a monthly minimum balance instead of the entire outstanding balance.  However, keep in mind that the interest charges will accrue if balances are not paid in full.  Essentially, credit cards allow you to borrow money and the cost of borrowing money is the interest you pay. 

How does a debit card work?

Debit cards allow you to electronically access your bank account and withdraw cash to pay for purchases.  Many financial institutions will issue debit cards to individuals that have checking accounts.  Unlike most credit cards where you pay a balance monthly, when you use your debit cards the funds come out of your checking account immediately.

Which one is better?

It really depends on your preference.  Below are some pros and cons of using both credit and debit cards

Credit Cards
Pros Cons

Personal Liability limitation.  With identify theft a serious issues, the Truth in Lending law limits to $50 the amount a cardholder must pay if a credit card is stolen

They can be too convenient.  You might appreciate buying what you need without going to the bank, but a credit card balance can rise quickly without proper management

Offer convenient purchase method when you don’t have cash

Many credit card companies charge late payment fees

Helps build a credit history

Interest rates increase if you miss a payment

Many credit cards offer benefits (i.e. frequent flier miles)

Many credit cards carry an annual fee

Provide a source of money for emergencies

Use “floating” annual interest rates that can go up without notice

Debit Cards
Pros Cons

Offer a convenient way to buy things in a manner that is analogous to writing a check, but faster.  The purchase amount is withdrawn almost immediately from your bank when you use your debit card.

If stolen, you are responsible for up to $500 worth of unauthorized purchases if not reported within 48 hours.

Can be used to obtain money form ATM’s

Some financial institutions will charge fees for using ATM’s outside of their network

Allow you to make deposits or transfers between accounts

Some financial institutions charge a quarterly or annual fee to use your debit card

** Above information taken from: 2012 NEFE CashCourse, 2012 CEPF Training Manual

 
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