When it comes to what’s in your wallet, consumers have choices. Here are some tips and information to help you understand the differences between credit and debit cards.
With a credit card, you can charge purchases up to the limit set by the company. If you don’t completely pay off what you borrow each month, you’ll be charged interest on what is left unpaid. That Annualized Percentage Rate (APR), also set by the company, is usually somewhere between 10 percent and 25 percent. The better your credit, the more likely you’ll qualify for a card with a lower APR.
If you don’t pay off your balance each month the company will look at how much you still owe and calculate a Minimum Payment, which is the least you can pay to keep the account in good standing. But try to pay off all or most of what you owe each month. If you only pay the minimum, it will take you a long time to pay off your balance. You’ll also end up paying a lot more, because that interest you’re charged is compounding (building on itself) each month.
With a debit card, your card is linked to your checking or savings account. When you make a purchase or get cash, the money comes directly out of your account, usually right away. Since you aren’t borrowing the money, you don’t pay interest and there’s no bill at the end of the month. However, you may still be subject to fees—especially if you spend more than you have in your account. For example, overdraft fees can mean that $5 slice of pizza winds up costing you $50.
There are also prepaid debit cards that you purchase and load with a set amount of money. Prepaid cards aren’t linked to a bank account.
Which card is right for you?
– Age matters. If you are under 21 it will be easier for you to get a debit card than a credit card, and that may guide your decision.
– Disputing charges. If you pay by credit card, you have more time and more power to contest a charge and possibly get your money back. This can help if you order something online and it never arrives, or if fraudulent charges show up on your bill.
– Lost or stolen cards. Credit cards also offer better protection if lost or stolen. With debit cards, report a lost or stolen card right away, since the amount you’re on the hook for can increase drastically if you don’t report it within two business days (up to $500), and can be unlimited if you don’t report within 60 days.
– Building debt and credit. Using a debit card means you don’t accumulate debt, but it also means that you aren’t establishing a credit history, which you’ll need when you’re ready to make a major purchase like a car or a home.
– Access to cash. Using a debit card to withdraw cash from your bank’s ATM usually doesn’t involve fees, although you may pay fees if you use another bank’s ATM. If you use a credit card to withdraw cash, you’ll usually be charged a fee. You may also face a higher APR than for normal purchases and you’ll likely be charged interest from the moment you withdraw the money.
– Look at interest rates. For credit cards, shop for the lowest APR you can find. Be on the lookout for low “teaser” rates designed to lure you in. Do your homework by determining what the rate will be after the discount period ends.
– Compare fees. Some debit cards will charge you high overdraft fees, while others may not. Credit cards can also come with extra fees including annual fees, late fees, fees for withdrawing cash, finance charges on unpaid balances, and charges for paying your bill by phone
Consider rewards. Credit cards may also offer incentives like rewards programs, while debit cards do not.
You can learn more about credit cards by visiting www.ncdoj.gov and the websites of the Federal Reserve Board, Consumer Financial Protection Bureau and the Federal Trade Commission.