What Is the Difference Between Credit Cards and ATM/Debit Cards?
Credit or debit? It’s a question that every cardholder has been asked, either by a live cashier or by the message on a credit card machine. Using each has pros and cons. Consumers should understand the difference between the two in order to make an informed decision that best fits with their personal financial goals.
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Funding
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A debit card transaction is funded from the cardholder’s bank account associated with the card. The money is removed (debited) from the cardholder’s account immediately. While consumers sometimes refer to a debit card as an "ATM card," and ATM card is actually a separate kind of card that only works at an ATM machine. A credit card transaction is funded from money belonging to the issuer (the bank or other financial institution that issued the card). The customer will receive a statement from the credit card company and has a set “grace period” in which to pay back the money without being charged interest.
Paying for the Transaction
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Because a debit transaction is automatically deducted from the cardholder’s bank account, he will pay for the transaction immediately and in full. Credit cards allow the customer to pay back the amount of the transaction over time, for a fee. Charge cards (such as a standard American Express card) are often confused with credit cards. A charge card provides the cardholder a grace period in which to pay back the transaction total, but requires that the full amount be paid on the due date.
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Consumer Fees
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Debit cards do not usually charge the cardholder a transaction fee, nor do they charge annual fees. However, the merchant is legally allowed to add a transaction fee for using a debit card (though most do not), whereas it is illegal for the merchant to charge a fee for a credit card transaction. Credit cards companies can charge a transaction fee, though most only do so in the case of cash advances. Some credit cards also require annual fees and charge fees for making late payments or going over your credit limit. In addition, credit cards charge an interest rate when balances are not paid in full at the end of each cycle.
Credit Reporting
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Debit cards do not report to credit agencies because the consumer is using her own money to pay for purchases and is therefore not using credit. As such, using a debit card does not contribute to your credit history or rating (either positively or negatively). However, if using a debit card causes an account overdraft that is not rectified, the bank that holds the account can report a delinquency to the credit bureaus. Credit cards (and charge cards) do report to the major credit bureaus and contribute to both your credit history and rating.
Merchant Fees
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The network (Visa, MasterCard, Honor, etc.) is the organization that makes an electronic transaction possible. Networks charge merchants a fee every time a customer uses his credit card to pay for goods and services. This fee can be a set amount, a percentage of the total or a combination of the two. However, when a customer uses his debit card, the network pays the merchant a set fee. This fee structure is why many credit card machines prompt customers to use debit cards (which can usually be processed either way) as a debit rather than as a credit.
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References
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