Everyone Needs to Know the Difference Between Credit and Debit Cards

In the wake of the Target data breach, it's essential to know the difference between a credit card and a debit card.

Jan 17, 2014 at 9:00AM

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.

By Images

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.

By Lendingmemo

Source: LendingMemo.com 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.

By Moneyblognewz

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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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Fool contributor Patrick Morris owns shares of Bank of America and Discover Financial Services. The Motley Fool recommends Bank of America, MasterCard, and Visa. The Motley Fool owns shares of Bank of America, Citigroup, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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