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Everyone Needs to Know the Difference Between Credit and Debit Cards

After the Target data breach, it's now more important than ever to understand the difference between a credit and a debit card -- viewing each correctly could save you thousands.

Source: Images of Money on Flickr.

At first glance, a credit card and a debit card are identical. They each are the same size, have a string of 16 digits, an expiration date, your name, and Visa (NYSE: V  ) or MasterCard (NYSE: MA  ) on the front. They both feel the same when pulled out of a wallet. They might each even have Bank of America (NYSE: BAC  ) on them. The back has a magnetic strip, and you can use them to make purchases just about anywhere. Yet, even more similar than the way they look is the way we interact with them.

With a simple swipe of the card, a punch of a PIN number on a keypad, or a quick signature on a screen or a piece of paper, you can make a purchase almost anytime or anywhere. Even when you make a purchase online, there's no real difference between the two. Fundamentally, it's how we interact with our money on a daily and hourly basis.

Source: on Flickr

However, the reality is, despite the similarities in features and use, the two are radically different, and careful understanding of those differences is critical to keep your information secure, and save you money.

One gives you fewer rights
I wrote a previous article outlining "Why You Should Never Use Your Debit Card" that details the reality that, in the event of a lost or stolen card, or a fraudulent transaction, customers simply have fewer rights with a debit card than a credit card. If you don't report a missing debit card within two days, you could be liable for up to $500 in false charges, versus just $50 with a credit card.

In addition, you could be in limbo longer as the bank reviews the charges in question, and you have almost no rights in the event a service or product you buy doesn't live up to expectations.

Put simply, Federal laws give credit cards more layers of protection than debit cards.

Each have cash back, but they are very different
Debit cards allow someone to easily withdraw cash at an ATM or a store following a purchase. But credit cards often offer cashback in the form of rewards on purchases. Bank of America offers their highly advertised 1/2/3 card that allows individuals to get 1% cashback on all purchases, 2% on gas, and 3% on groceries.

Source: Money Blog Newz on Flickr

The Bureau of Labor Statistics reports that the average American spent $2,500 on gasoline and nearly $4,000 on groceries in 2012, meaning that the cashback rewards on those purchases alone could mean up to $170 in cashback rewards from the use of that card. And almost every card these days offers great rewards, including the popular 5% rolling quarterly categories at Discover and Citigroup.

However it's also vitally important to note that credit cards can allow consumers to get "cash advances," to have actual cash in their hands, just like a debit card. But those are often at the cost of exorbitant fees, and should almost always be avoided.

One is using "borrowed" money
While credit cards offer great benefits when you use them, a credit card, by nature, is borrowing money. Provided the balance isn't paid in full each month, the customer pays interest on the remaining amount. On the other hand, a debit card transaction is directly pulling -- debiting -- money out of an individual's checking account with each purchase.

Paying off $5,000 in credit card debt over five years with a 19% interest rate would mean payments of $130 a month, resulting in more than $2,750 in interest charges. Put simply, credit cards can be mighty expensive if they are extended too far.

The thought of a credit card charging 19% on a purchase make many recoil in fear -- and rightly so -- but the reality is that if you treat your credit card in the same way as your debit card, and only make purchases you know you can afford, then no interest is ever charged, and the previously mentioned benefits are in full effect.

While there are certainly other differences between credit and debt cards in terms of fees, other benefits and concerns, those are the three crucial things to know in understanding the differences between them.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 17, 2014, at 11:50 AM, ZAP1ROWSDOWER wrote:

    If you don't know the differences you don't deserve to have either one.

  • Report this Comment On January 18, 2014, at 5:23 PM, mumsie wrote:

    Who writes this stuff? Who doesn't know the difference between the two. What part of you have to have the funds in the bank to use a debit card is hard to understand. To think people get paid to write this tripe.

  • Report this Comment On February 13, 2014, at 12:36 PM, DirtyDoggg wrote:

    Credit cards offer greater protection on the quality of your purchase. If you're not satisfied with the quality you can file a dispute. If the case is resolved in your favor you won't have to pay the charge. Debit cards offer no such protection.

    Credit cards also often offer additional benefits such as collision coverage when renting a car, obviating the decision of whether to purchase the damage waiver, and life insurance when traveling on a common carrier (e.g. bus or airplane) as a fare-paying passenger when the card is used for these transactions.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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