Debtor and Creditor

Debit Cards, Credit Cards, Charge Cards, Oh My...

By Margaret Jasper, Attorney

More and more Americans are using their credit cards to pay their bills, and buy morning coffee, and then don't pay them off each month. At one time, there were only charge cards for large department stores that users were required to pay each month. Today, there is a much wider selection of charge, debit and credit cards. What's the difference among them and how can you manage each correctly in these uncertain times?

The main difference among the cards is how they're paid off, Depending on the type of card used, the balance may be payable in full at the end of the billing period, or in installments over a longer time period. It's important to know how purchases are treated so you can budget your money effectively.

Debit Card

Banks issue debit, or ATM, cards making it easier for customers to access the money that's already in their bank accounts. The card holder may use the debit card to withdraw money at an ATM machine or swipe it at a store to purchase goods and services. Using a debit card is more convenient than writing a check or carrying cash, and most of the time there are no fees. When you make a purchase, you'll provide your PIN (personal identification number) to complete the transaction.

A debit card is not a credit card. This can be confusing because many banks issue debit cards having either a MasterCard or Visa imprint on the front of the card - called "dual-purpose" debit cards. These two logos are associated with the two major credit card companies. The primary reason for the dual-purpose debit card is so the card holder can use the card worldwide, with the millions of merchants that accept MasterCard or Visa as payment.

You can use the dual-purpose debit card as a debit card as usual. However, when using the dual-purpose debit card somewhere that doesn't accept bank debit cards, you don't enter your PIN. Instead, you sign the receipt as if you were using a credit card.

No matter how you use the dual-purpose debit card, you aren't getting any "credit" from the bank. Unlike a credit card, the bank isn't "lending" you any money - you're accessing your own money. The amount you "charge" on your dual-purpose debit card is taken out of your bank account in the same manner as when it's used as a debit card. In addition, unlike a credit card, you don't pay interest when you use a dual-purpose debit card.

Credit Card

A credit card allows you to charge goods and services. The credit card company basically "lends" you money up to a certain amount, known as your credit limit. You receive a bill from the company and have the option of paying the entire balance or paying smaller amounts.

Paying in installments requires a minimum amount to be paid each month, and you're charged interest on the unpaid credit card balance. If you pay the entire balance by the due date, there's no interest.

It's important to make your payments on time, at least more than the minimum, and stay within your credit limit. Credit card companies charge a significant fee if you pay late or exceed your credit limit. Therefore, you must carefully monitor your credit card account activity. If you need to make a purchase that exceeds the limit, you can call and sometimes they'll make an exception.

In an effort to reduce their risk, American Express has offered to provide certain customers a $300 debit card if they pay off their balance and close their account by April 30, 2009. This offer does not apply to the American Express charge card. It applies to the AMEX credit cards, such as Optima and Blue.

Having a credit card and being careful with it is a good way to establish credit, but it doesn't take much for good credit to sharply decline into bad credit.

Charge Card

In general, charge cards aren't as widely used as credit cards today. A charge card is similar to a credit card; however, you must pay the full amount of the bill at the end of the billing period, usually within 30 days of the purchase. In addition, the company issuing the charge card often charges an annual fee.

Because the total balance is paid at the end of the billing period, no interest is charged. A hefty fee is added to your account if you don't pay the total amount due, and your charging privileges may be restricted or the card may be cancelled.

Know the Difference

It's important to know whether your card is a debit card, credit card or charge card in order to monitor your cash flow. If the card is merely for convenience, the debit card is a practical no-fee way to make your purchases without carrying around cash or writing checks. The charge card is also a convenient method of payment, and provides you with a short-term no-interest loan, although fees may apply.

A credit card offers the most flexible repayment options if you're in a difficult financial situation, and need time to repay your debt. However, one disadvantage is that you'll accrue interest on your unpaid balance. The additional interest and any fees you incur can reduce your credit limit and affect your credit score.

One option you may consider, if you qualify, would be to transfer your balance to a new card that has a zero percent interest rate, which will give you more time to pay off the balance without incurring additional interest. Watch out for increased interest rates once the zero-percent interest time-period ends, though.

In the news, you see what abusing credit cards and overextending yourself can do to personal finances. Don't let their mistakes be your downfall as well. With a bit of forethought, you can master all of the cards in your wallet, don't let them master you.

Questions for Your Attorney

  • In terms of theft, fraud or other consumer protection laws, are there any differences between credit, charge and debit cards?
  • If my debit card is stolen and my account balances are affected, how long does my bank have to resolve account issues and return my money?
  • I'm a victim of identity theft, and can you help me resolve issues with my credit, charge and debit card accounts?
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