Basics of Credit, Debit & Charge Cards

Until I started writing about personal finance, I thought every plastic card in someone’s wallet or purse was a credit card. We can thank clever marketing for that (Priceless?). It wasn’t until later that I learned the pantheon of plastic cards included two others – debit and charge. What’s the difference? Why are some places willing to give you a discount to use debit?

Credit Cards are probably the most well understood and most abused card of the three. A bank will extend you a line of credit, called your credit limit, that you can access with the plastic credit card. Each month, you are issued a statement of how much you owe and are asked to pay at least the minimum payment. You are charged interest on your outstanding balance. The big appeal of credit cards are the credit card reward programs and the flexibility of getting a short term loan during the grace period.

Charge Cards operate like credit cards but you are required to pay the balance in full each and every month.

Debit Cards are issued by a bank and linked to your checking account. When you purchase something using a debit card, the charge is debited from your checking account. If you run out of money, you will either be assessed an overdraft charge or the charge will be denied. You aren’t borrowing money when you use a debit card and you make no payments, the money is taken directly from your account. The big appeal of debit cards is that you can’t go into debt as easily as with credit.

Consumer Protection Differences: Credit/charge cards have the strongest consumer protections against, though debit cards aren’t far behind. Many credit card companies offer zero liability fraud protection. The FTC explains fraud liability with credit, ATM and debit cards.

Finally, merchants prefer debit cards. Credit and charge cards are far more expensive than PIN-based debit cards (signature based debit cards are the same as a credit card to a merchant), which is why some stores and gas stations offer a discount for cash or debit cards. A debit card transaction is usually ten to fifteen cents whereas a credit card transaction is a flat fee plus a percentage of the charge.

Jim writes daily about money issues at personal finance site Bargaineering.com.