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What are Debit and Credit Cards - 2020

Feb 16, 2020

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Credit cards and debit cards typically look almost identical, with 16-digit card numbers, expiration dates, and personal identification number (PIN) codes. But that is where the similarity ends. Debit cards allow bank customers to spend money by drawing on funds they have deposited at the bank. Credit cards allow consumers to borrow money from the card issuer up to a certain limit in order to purchase items or withdraw cash. You can also use the credit card generator tool developed by VCCGenerator can quickly generate specific credit card numbers along with complete details by assigning number prefixes. 

You probably have at least one credit card and one debit card in your wallet. The convenience and protection they offer are hard to beat, but they have important differences that could substantially affect your pocketbook. Here is how to choose which to use when you need to swipe the plastic.

Important Points:

•  Credit cards give you access to a line of debt issued by a bank. Debit cards deduct money directly from your bank account.

•  Credit cards offer better consumer protection through warranties and fraud protection but are costlier.

•  Debit cards offer less protection, but they have lower fees.

•  Newer debit cards offer more credit-card-like protection, while many credit cards no longer charge annual fees.

Credit Cards

A credit card is a card issued by a financial institution, typically a bank, and it enables the cardholder to borrow funds from that institution. Cardholders agree to pay the money back, with interest, according to the institution's terms.

Credit cards are issued in four categories:

•  Standard cards simply extend a line of credit to their users.

•  Rewards cards offer cash back, travel points, or other benefits to customers.

•  Secured credit cards require an initial cash deposit that is held by the issuer as collateral.

•  Charge cards have no preset spending limit, but often do not allow unpaid balances to carry over from month to month.

Credit card users can reap cash, discounts, travel points, and many other perks unavailable to debit cardholders by using rewards cards. Consumers who pay off their cards in full and on time every month can profit substantially by running their monthly purchases and bills through rewards cards.

Credit card use is also reflected in a consumer’s credit report, which allows responsible spenders to raise their scores with a history of expenditures and timely payments. These cards may also provide additional warranties or insurance for items purchased above those the retailer or brand is offering. If an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, for example, it is worth checking with the credit card company to see if it will provide coverage.

Credit cards still offer much greater protection than debit cards in most cases. As long as the customer reports the loss or theft in a timely manner, their maximum liability for purchases made after the card disappeared is $50. The Electronic Fund Transfer Act gives debit card customers the same protection from loss or theft but only if the customer reports it within 48 hours of discovery. After 48 hours, the card user's liability rises to $500; after 60 days, there is no limit.

The Fair Credit Billing Act allows credit card users to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping. But if the item was bought with a debit card, it cannot be reversed unless the merchant is willing to do so. What is more, debit card theft victims do not get their refund until an investigation has been completed.

Credit cardholders, on the other hand, are not assessed the disputed charges; the amount is usually deducted immediately and restored only if the dispute is withdrawn or settled in the merchant's favor. While some credit and debit card providers offer zero-liability protection to their customers, the law is much more forgiving for credit cardholders.

If you need to rent a car, many credit cards provide some sort of waiver for collisions. Even if you want to use a debit card, many car rental agencies require customers to provide credit card information as a backup. The only way out for a customer may be allowing the rental agency to put a hold of perhaps a few hundred dollars on a bank account debit card as a form of surety deposit.

Pros and Cons of Credit Cards

Credit cards allow you to borrow money from a bank to make payments now. When you use one, the bank pays the recipient on your behalf, and you later repay the bank. While these cards are convenient, they are not without their downsides.

1. They Are Less Risky, But Losses Occur

With a credit card, you can spend the bank’s money, now but you have a grace period before payment is due. That gives you more time to notice errors and dispute them while keeping your checking account intact. When you (or thieves with your card and PIN) use a debit card, the money comes out of your checking account immediately.

Credit cards also offer better protection against fraud. That said, today, most debit cards offer voluntary “zero liability” coverage. In addition, you can still lose money (albeit a small amount) with credit cards. With credit cards, you can’t lose more than $50 to fraud, but with debit cards, your liability is potentially unlimited under federal law.

2. They Can Build Credit Or Hurt It

Keeping a credit card account open helps you build a strong credit history or keep your credit in good shape. Debit cards, for the most part, do not affect your credit. Some die-hard debit card users may say they don’t care about credit scores because they’ll never need to borrow, but those scores are important. You might want to borrow someday (to buy a home or automobile, for example), and starting from scratch is hard.

You won’t pay any interest charges if you pay off your credit card balances in full every month. However, if you fall behind on payments, your credit score could drop, which generally isn't a possibility with debit cards.

3. They Offer Rewards, But Debit Has Its Perks

If you’re incentivized by bonuses, credit cards on the whole offer better rewards than debit cards in the form of sign-up bonuses, discounts, cashback, or travel points. Some credit cards even offer extended warranties on items you purchase as well as limited travel insurance.

While the average debit card doesn't offer such rewards, a small subset of debit cards linked to "rewards" checking accounts offer some of these benefits. For example, there are multiple cashback debit cards on the market.

Some rewards debit cards carry fees or impose spending restrictions that may outweigh the rewards, so read the fine print.

4. They Have High Limits But Promote Overspending

Credit cards often come with limits that are greater than the amount of cash you keep in checking. As a result, you don’t have to worry about hitting your limit due to authorizations and holds. You’ll have fewer problems using your card for rental cars, hotels, gas at the pump, and dining where pre-authorization holds lock up funds for several days, whether or not you pay with the card).

But if you have trouble budgeting, you can easily max out your credit limit, which can send you further into debt and hurt your credit score.2 In contrast, you can only spend money you have with a debit card, so they can curb the impulse to spend.

Debit Cards

A debit card is a payment card that makes payment by deducting money directly from a consumer’s checking account, rather than via loan from a bank. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors like Visa or MasterCard.

There are also two types of debit cards that do not require the customer to have a checking or savings account, as well as one standard type:

•  Standard debit cards draw on your bank account.

•  Electronic Benefits Transfer (EBT) cards are issued by state and federal agencies to allow qualifying users to use their benefits to make purchases.

•  Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was pre-loaded on the card.

Frugal consumers may prefer to use debit cards because there usually are few or no associated fees unless users spend more than they have in their account and incur an overdraft fee. The no-fee advantage does not hold for prepaid debit cards, which frequently charge activation and usage fees, among other costs. By contrast, credit cards generally charge annual fees, over-limit fees, late-payment fees, and a plethora of other penalties, in addition to monthly interest on the card’s outstanding balance.

How do Debit Cards work?

A debit card draws on money the user already has, eliminating the danger of racking up debt. Retailers know people usually spend more when using plastic than if they were paying cash. By using debit cards, impulsive spenders can avoid the temptation of credit. Many of the user benefits offered by credit card companies are funded by the interest and other charges of those who do not pay off their balances each month.

In addition, some debit cards particularly those issued by payment processors, such as Visa or MasterCard are starting to offer more of the protections enjoyed by credit card users.

Pros and Cons of Debit Cards

Debit cards are linked to your checking account. When you use one, money immediately gets taken out of the linked account.1 These cards come with advantages and disadvantages.

1. They Avoid Debt, But Funds Run Out

For many, the advantage of debit cards is that you don’t go into debt when using them. They limit spending to what’s available in your checking account. There also won’t be interest charges each month. However, when you run out money, the card will be declined unless you opt in to overdraft protection, in which case the bank will pay for the transaction. If you don't and have an unplanned expense, you may not have enough money in your account at the time to make a purchase.

2. They Have No Annual Fees But Incur Other Fees

Using debit cards is also inexpensive. They often do not charge the annual fees that some credit cards do. In addition, many banks offer free checking with no maintenance fees. As an added benefit, if you need cash from an ATM, you can generally get it for free using your debit card at ATMs affiliated with your bank. However, using other banks' ATMs may incur ATM fees.

Some checking accounts which you’ll need for a standard debit card charge maintenance fees if you don’t qualify for a waiver, but a checking account is practically a necessity a credit card is not. In addition, if you sign up for overdraft protection, you will incur overdraft fees. If you have a hard time controlling your spending, you could wrack up a considerable amount in overdraft fees. There are a few other situations where you can get hit with insufficient funds charges if you write a check that bounces, for example but those cases are relatively rare.

3. They're Good for Small Purchases But Complicate Big Ones

Merchants pay fees to process your payments, and debit card swipe fees are typically much lower than credit card fees although there are exceptions. As a result, some merchants require you to meet minimum purchase thresholds when you use a credit card a $10 minimum, for example. In contrast, you can often avoid swipe fees when you use a debit card, keeping your favorite businesses' costs low.

But one of the cons of debit cards is that if you make a large purchase, you're forced to spend immediately, as the funds immediately get taken out of the count. Credit card expenditures are loans, so you don't have to pay back what you borrowed right away, which allows you to keep your money a little longer.

4. They're Easy to Get But Require a PIN

Debit cards are easier to get if you have bad or no credit. If you can get a checking account, you can get a debit card. You don't have to apply for it separately like a credit card. In contrast, you have to apply for a credit card separately, and some cards are limited to people with high credit scores. If you get a card from a bank other than where you do your banking, it also won't be linked to a bank account, which introduces more complexity to your finances. You'll often have one more username and password, another card number that can get stolen, and an extra payment you need to stay on top of each month.

However, one of the cons of debit cards is that they make spending slightly less convenient for the consumer. Unlike with a credit card, you can't simply swipe a debit card; you also have to enter a personal identification number (PIN) to prevent others from stealing your card and misusing it.

Which Is Better?

A credit card is best for most purchases. When you shop online or in-person, a credit card protects you in several ways that a debit card can’t including sheltering your checking account, extended warranties, and more. The key is to pay off the card’s balance completely every month to avoid finance charges.

A debit card is better for cash withdrawals and helps to avoid overspending and debt. For cash withdrawals at ATMs, your debit card is the best option. You’ll keep fees at a minimum, and your card information is unlikely to get stolen if you stick to safe ATMs. If a credit card will tempt you to take on a mountain of debt, stick with a debit card. But ultimately, you need to take charge of your spending the type of card you use can’t do it for you. If you don’t do that, you’ll find ways to cheat and spend more than you should regardless of what’s in your wallet.