Credit & Money Management

Charge and Debit Cards

Not all plastic cards are created equal.

By the Editors of Kiplinger's Personal Finance Magazine

June 2010

When discussing the kind of credit that comes with a plastic card, the first distinction to make is between charge cards and credit cards. American Express Green Card and Gold Card and Diners Club Charge Card are charge cards that require you to pay your bill in full each billing cycle. Most credit cards (including some offered by companies that also issue charge cards) don't necessarily encourage you to pay your bill in full because they profit by charging interest -- lots of interest -- on the unpaid balance.

Charge cards. Travel and entertainment cards, such as American Express and Diners Club, are charge cards, not credit cards. You are expected to pay their bills in full within a specified time period. If you don't, you'll be penalized.

Membership fees for charge cards are higher than for bank-issued cards, and the kinds of service they offer -- an annual accounting of charges, traveler's checks, cash in an emergency -- are commonly available with credit cards, too, especially gold or platinum cards.

You may be able to get a bigger credit line with a charge card, but they're not as widely accepted as Visa or MasterCard.

Debit cards. A debit card appears to work the same way as a credit card: The merchant runs it through a little machine and off you go without any cash actually changing hands. But that's where the similarity ends. When you use a debit card, the amount of your purchase is deducted from your checking account or some other account you have designated. It's useful to think of a debit card as a paperless check that clears immediately, with no grace period, or "float."

If you're not paying close attention, you may find yourself carrying a debit card from your bank that you think is a credit card. That mistake usually lasts no longer than the arrival of your first bank statement showing your depleted balance.

The main use for debit cards used to be to get cash from automated teller machines, but devices known as point of sale terminals have been installed in an increasing number of retail outlets. Beginning in August (July for new accounts), your bank will ask if you want to opt-in for overdraft protection. If you don't, your transaction will be declined. This will also occur at the ATM.

Two key facts to remember about debit cards:

1. Although they look like credit cards, they aren't.

2. Safeguards against loss or theft and unauthorized use of your card aren't as strict as they are with credit cards. By law, you're liable for the same $50 as with a credit card, but only if you report an unauthorized transaction within two business days of discovering it. Miss that deadline and you're legally responsible for up to $500. But MasterCard and Visa will waive it entirely in many cases.

Next: How to Protect Your Rights

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