Credit Cards and Debit Cards
A credit card is issued by a bank to an individual and can be used to purchase items and services. Purchases are limited to a maximum amount or credit limit. A fee is typically charged by the bank for the use of a credit card; however, some cards are issued without requiring an annual fee. Banks issuing credit cards pay vendors for purchases, before the credit card holder has paid the bank.
A debit card basically allows a bank account holder to electronically transfer money to make a purchase. However, unlike an ATM (automatic teller machine) card, the debit card has a MasterCard or Visa logo, allowing a vendor to "charge" purchases to the debit card. The charge is really an automatic deduction from the debit cardholder's bank account.
TIP: Debit cards are also known as check cards because the holder is using it like a check without having to write one.
SIDEBAR: The Federal Reserve, which places limits on liability for fraudulent use of credit and debit cards, refers to debit cards as EFT (electronic fund transfer) cards.
SIDEBAR: ATM cards cannot be used at stores to make purchases. They can only be used to withdraw money from the holder's account at automatic teller machines. Using an ATM requires a password or PIN (personal identification) number.
Can a credit card company refuse to issue a credit card for any reason?
No. Laws prohibit credit card companies from refusing credit based solely on marital status or advanced age.
SIDEBAR: The Equal Credit Opportunity Act requires that all credit applicants be considered on the basis of actual qualifications for credit (income, employment, credit history) and prohibits refusing credit because of certain personal characteristics.
What is the APR?
The APR is the annual percentage rate or interest a bank charges you on your outstanding debt. By law, credit card companies must disclose the APR to consumers.
Is there a limit to the amount of interest credit card companies can charge consumers?
Under federal law, no. However, some states have enacted laws that put a ceiling on allowable interest rates, typically 18 to 22 percent.
What are the disadvantages of debit cards?
Debit cards have two drawbacks: a PIN is often not required for store purchases and the holder is not automatically protected by the $50 fraudulent use limit. A thief can use a debit card to charge purchases over the phone (no PIN required), for example, and drain the holder's bank account.
SIDEBAR: The Federal Reserve has published the "Consumer Handbook to Credit Protection Laws" on their Web site at www.federalreserve.gov/pubs/consumerhdbk/default.htm.
Am I required to notify the bank if my debit card is stolen?
Yes, if you want to limit your liability for any unauthorized purchases.
SIDEBAR: Your liability is:
- limited to $50 if the bank is notified within 2 business days of your learning of the loss or theft of your card or code
- increases to $500 if the bank is notified after 2 business days
- unlimited if you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you
Why am I not allowed to charge more than $50 worth of gas on my debit card?
Banks have voluntarily limited an account holder's risk to $50 by not authorizing bigger purchases at convenience stores, gas stations and other business where identification may not be required when the debit card is used.
My debit card has a MasterCard logo on it. Does this mean I am protected as if it were a regular credit card?
Yes. Both MasterCard and Visa have increased liability protection. MasterCard limits a customer's liability for losses incurred from a lost or stolen debit card to $50. Visa debit card customers pay nothing if the card is reported missing within 2 business days of the loss being discovered. After that, customer liability is capped at $50.
TIP: Check with your financial institution about your liability. Many card issuers offer consumers better protection than what the government requires.
Why is my credit history important if I am applying for a credit card?
Banks issuing credit cards use your credit history to determine if you have paid previous loans or credit cards on time or late. Credit histories show:
- current amount of outstanding debt (if you currently owe $100,000 on credit cards, it is unlikely you will be approved for another card even if your payment history is perfect
- stability in employment (shows you are likely to be continued to be employed in the future and able to make payments)
- home ownership (shows you were a good credit risk for a mortgage and that your lifestyle is consistent, i.e., you are unlikely to skip town)
Can I get a credit card if I have a low credit score?
Yes. Many banks specialize in high-risk individuals. Your fees and interest rates will be much higher because of your low score.
TIP: Secured credit cards are also available. The credit cardholder deposits money on the card to be used for purchases. Although the secured credit card is essentially a debit card, it allows you to build up a good credit history and increase your score.