Debit vs. credit
While they may look alike and can be used for the same purpose, the main difference between a debit and a credit card is whose money you’re using.
The question of debit card vs. credit card isn’t an either/or decision. Both cards have a place in your pocket.
Debit card: your own money
Don’t get hosed at the pump by your debit card.
Hosed at the Pump
If you use your debit card at a pump that doesn’t require a PIN, a chunk of your checking account can be blockedsometimes for days.
That’s because gas stations regularly block an amountoften $50 or $75on those type of transactions.
That amount doesn’t “un-block” as you drive away. Instead, the hold can remain for several days, until the station does a “batch” transaction, according to USPIRG, a public interest research group.
That’s because only PIN-based transactions are processed immediately. Since gas stations don’t know how much gas you’re about to pump, they earmark a certain amount of your money.
They want to make sure that they get payment for the gas!
Credit-card companies have been doing this for a long time, on certain transactions, like car rentals. It’s not such a big deal because it’s probably not flirting with your credit limits.
Putting a chunk of dough in your checking account off-limits without your knowledge, however, can be a real big deal!
A debit card gives you access to your own money. It works like a check because it draws upon your checking account balance. You have to have money in the account in order to pay for something with a debit card.
For example, you want to use your debit card to buy an iPod flea for $199.
The iPod Flea
Don’t let your friends know who told you about told you this!
Guess what? You must have at least $199 in your checking account to cover the purchase.
The $199 is electronically deducted from your checking account. While the actual deduction may take place hours later or even the next day, the card places a “hold” on the $199 right away, reserving your money for that transaction.
Checks can be processed as fast as debit transactions!
Checks can be Processed FAST!
When you write a check, some merchants can deduct the amount from your checking account instantly, using electronic check conversion, so watch out!
If you’re lucky, it can take several days for the transfer of funds to take place. Why?
Because if the merchant isn’t using electronic check conversion, several parties have to handle the check before the transaction is completely processed.
For example, when you write an $199 check for the iPod flea the:
Merchant deposits your check into an account at its own financial institution;
Merchant’s financial institution sends your check to a clearinghouse, an institution that helps financial institutions make payments to each other;
Clearinghouse directs your credit union to shift $199 from your checking account to the merchant’s account;
Check returns to your credit union.
Physically handling checks in this way takes time. That makes it more expensive for financial institutions. That’s why credit unions often provide debit cards to members at little or no cost.
Credit card: a lender’s money
A credit card gives you access to a lender’s funds. That means a credit card transaction is a type of loan. Every time you pay for something with your credit card, you are in fact borrowing that amount of money from the credit card company.
The bill arrives later asking for paymentplus interest, if you carry an unpaid balance from one month to the next.
If You Carry an Unpaid balance
When the credit card bill arrives, it will tell you the balance due, and it will also give you a minimum required payment of say, $15.
If you pay only $15 instead of the entire balance, you still have to pay that balance, eventually. In addition, you have to pay interest on the balance that is carried over to the next bill (usually a month later).
Check the Minimum Payment Calculator to see how much a credit card purchase can actually cost if you carry a balance instead of paying it off in full immediately.
For example, if you buy the iPod using your credit card, you’re promising to reimburse the credit card company later for the use of the $199.
Why use plastic at all?
Why would you want a credit or a debit card? Think convenience. They often work when checks don’t:
Some businessesrestaurants, for exampledon’t accept personal checks, but they’ll accept credit cards and debit cards;
Personal checks are rarely accepted outside your city or state, but can use plastic nationally and internationally;
Using plastic is faster than writing a check;
You have to remember to reorder checks when you run out;
Checks cost you money.
Smart use of debit cards.
If you decide to use plastic
If you want to use a credit or debit card, talk to your credit union’s member service representative.
Many credit unions make debit card accounts available to youth before they are able to have a credit card in their own name.
Using debit cards is a good way to have the benefits of both worlds.