Thursday, November 12, 2009

Debit cards or credit cards

Debit card

A debit card (also known as a bank card or check card) is a plastic card that provides an alternative payment method to cash when making purchases. Functionally, it can be called an electronic cheque, as the funds are withdrawn directly from either the bank account, or from the remaining balance on the card. In some cases, the cards are designed exclusively for use on the Internet, and so there is no physical card.

The use of debit cards has become widespread in many countries and has overtaken the cheque, and in some instances cash transactions by volume. Like credit cards, debit cards are used widely for telephone and Internet purchases, and unlike credit cards the funds are transferred from the bearer's bank account instead of having the bearer to pay back on a later date.

Debit cards can also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash and as a cheque guarantee card. Merchants can also offer "cashback"/"cashout" facilities to customers, where a customer can withdraw cash along with their purchase.

Credit card

A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.

A credit card is different from a charge card, where a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers to 'revolve' their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1. This is defined as 85.60 × 53.98 mm in size.

Debit cards or credit cards?

Credit or debit? That question will sound familiar to anyone who has presented their credit card or debit card when making an in-store purchase. But before you even get to the register, you should ask yourself that very same question in order to decide if you want a debit card or credit card in your wallet.

For consumers, the difference between a "debit card" and a "credit card" is that the debit card deducts the balance from a deposit account, like a checking account, whereas the credit card allows the consumer to spend money on credit to the issuing bank. In other words, a debit card uses the money you have and a credit card uses the money you don't have. "Debit cards" which are linked directly to a checking account are sometimes dual-purpose, so that they can be used as a credit card, and can be charged by merchants using the traditional credit networks. A merchant will ask for "credit or debit?" if the card is a combined credit+debit card. If the payee chooses "credit", the credit balance will be debited the amount of the purchase which is then withdrawn at a later date; if the payee chooses "debit", the bank account balance will be debited the amount of the purchase and the money will be withdrawn from the bank account immediately. Another option is to have a credit connected to the bank account so that if there is no money on it, the bank allows some negative balance according to a credit agreement. Then the customer does not have to choose credit or debit, the debit card turns into a credit card if there is not enough account balance.

Paying by debit is quick and easy, and will not result in you paying any interest. However, as mentioned earlier, debit card users do not experience the float enjoyed when making a check or credit card payment. When making debit card payments for large purchases, it is best to do so at a store that allows you to thoroughly inspect the merchandise before buying. Also, large purchases may need to go on your credit card due to the fact some debit cards carry a maximum daily spending limit. Finally, credit cards remain preferable for ordering merchandise over the phone or the Internet, as they allow the consumer greater recourse in case something goes wrong.

Remember, its prudent to live within one’s means, and in that regard the discipline of spending using one’s Debit card is a good one. Use your credit card only when you are confident that you have the capacity to repay your dues.