Choosing Between Credit or Debit
July 20th, 2008 | by admin |
Choosing between credit or debit can be a little confusing. At the bank, you have an account that is termed a “debit account”. You put money into the account, then write checks or withdraw against that amount, and only that amount. When you take out a debt with a store or financial company, you now have a “credit account” in that you have a predetermined line of credit that you can spend up against. In reality, your available bank account funds are an asset while your owing credit accounts are debts.
At the store, you again are choosing between credit or debit, or cash. You can open a credit account. Or, you can pay with cash or your convenient bank card, which will be either a credit card or a debit card. The card itself may be the same card for both financial functions if the bank is also extending you a small credit line. If you run it as a credit card, the store is charged a small fee for accepting it, they usually run all their charges later in the day in a batch, and the charge is made to your account in a day or two. If you run it as a debit card, the store does not have to pay the small acceptance fee, and the debit is run as soon as you key in your PIN number. The amount is taken out of your bank account balance immediately. You might want to remember this fee factor when choosing between credit or debit at the store checkout. Some stores will not accept credit cards because they do not want to pay fees that cut into their profit margin.
Both types of cards look the same. Both have protection against fraud and theft, if you report them within a short time period. The bigger danger is with the debit card, which accesses your bank account directly. If someone steals your PIN number, they can obtain a balance statement and withdraw all your available money. Banks try to stop fraud by setting daily withdrawal limits and even calling you if transactions appear to be strange or unusual. Your PIN number should be protected by you and kept private. Never give that information to friends or family, and never store it in your wallet or purse.
Both cards are used at ATM machines, but your debit card normally has a lower ATM fee charge than your credit company card. With your credit card, you can get cash advances up to a limit set by the company. When you withdraw from your bank debit card, your limit is the cash available in your account, unless the daily limit set by the bank is less than your balance.
People like to have bank debit cards because they function just like a credit company card, and often carry the same financial institution logos, such as those of VISA or MasterCard even though they are issued at the bank. Bank cards are accepted at most places of business, unless they refuse cards because of the fees charged to them.
Bank credit/debit cards are backed by money in your account. With a true credit card, it is generally an unsecured debt, backed only by your promise to pay. New applicants may be able to obtain a card only if they agree to a security deposit, usually $300, a frequent starting limit. The credit card company holds your deposit, and if for some reason you default, they pay your charges with your security deposit.
There are other reasons people enjoy using credit cards. When making a significant purchase, you can spread the payments out over time at a lower interest rate than most store credit offers. Some cards offer perks, such as cash back, and special offers. And, there is the personal satisfaction of knowing you are credit worthy. Even if you start with a secured card, or a low credit limit, having a credit card and using it responsibly is a great way to build your credit record. Monthly reports are submitted to the credit reporting agencies, and a record of steady payments shows that you can budget and handle your money wisely.
As always, read the fine print on your credit and debit card agreements before you accept any card obligations. If you have further questions, just ask your banker or call the credit card company and ask for explanations. Use credit wisely, it can be a wonderful asset to your financial success.