Is this a credit or debit card?

As we enter the holiday season we will be using our credit cards and debit cards - but did you know there are subtle, but significant differences between the two?   And the they can affect you in a big way. Here are three differences.

The first difference is the protections you receive from credit cards verses debit cards, in part under Federal Regulation E. Say, for instance, you make a purchase at a store for delivery the following week ($300). The seasonal cashier runs your card for the purchases, but innocently thinks the card didn’t go through so the cashier re-enters the amount and swipes the card a second time; total charge $600.

If you used a debit card and notice the duplicate charge, first notify the merchant then you must notify your bank within two business days to limit your liability to the first $50. If you don’t notify the bank within two days, your liability is $500, and if you don’t notify your bank within sixty days, you have unlimited liability. Most debit card users don’t realize the strict notification rules.  Let’s say you notified your bank within the two days. Under federal law, the bank can take up to ten days to investigate the problem and during that time you are out the $300 until the investigation is completed; if you needed that money to pay bills, or for groceries, you are out the cash. If you had checks that had already been mailed that relied on the $300 you either need to make a stop payment (which has a fee, and the person you mailed the check to won’t get paid) or you face overdraft and insufficient fund charges. The bank can take an extra 45 days (but with a temporary reimbursement) to complete the entire investigation.

If you used a credit card and notice the duplicate charge, first notify the merchant then you must notify your credit card company within sixty business days in order to dispute the charge in order to limit your liability to the first $50. While the charge in is dispute, you will not be charged interest or have to make payments on the disputed charge. Your checking account is unaffected; that is a big difference.

Let’s use the same example and say there was only just the one $300 charge, but the merchandise was never delivered the following week as promised (they said they delivered it, you never got it). Of course first you try to resolve the problem with the merchant.  If you paid with a debit card you are now already past the two business day notification window and unless your bank has a policy that is more generous that the law allows, your liability is the first $500 – you are out the $300. You must continue to fight directly with the merchant to either get your money back or get replacement merchandise. If you paid with a credit card, you can file a complaint with the issuing credit card company and they will help investigate on your behalf – and you don’t have to make payments on the $300 charge until it is resolved. The federal laws are much more consumer friendly for credit card transactions. 

A second difference between credit cards and debit cards is blocking. Many firms (hotels, gas stations and car rental companies) routinely block a card in advance for the estimated cost of a transaction that, sometimes, may not be completed for several days or weeks.  It isn't a problem for most credit card customers (unless they are near their account limits). When you swipe your debit card at a gas station, it is done pre-purchase – the gas station’s bank has no idea how much gas you will pump so it ‘blocks’ somewhere between $50-$75 of cash in your account for the transaction. If you decide to purchase just $10 of gas and use the rest of the money in your checking account for holiday gifts, up to the remaining $65 is blocked for up to 3 days in some cases. They hold your money hostage. It doesn’t seem consumer friendly, but the law allows it.

A third difference between credit and debit cards are that debit cards do not help build credit history. If you are looking to build and improve credit history, charges and timely payments on credit cards are used in the calculation of the overall credit scores.  Checking account payments (done by debit cards) are not considered in credit scores, unless the use of the debit card causes an overdraft and insufficient fund charge on the checking account.

In summary, use your debit card for smaller cash & carry transactions at familiar, trusted retail locations. Use your credit card for larger transactions, all internet transactions, and goods and services that are promised in the future, and always pay off the credit card quickly.  

Tom Chmielewski is a Certified Product Manager, Pragmatic Marketing Certified, and a Certified Identity-Theft Risk Management Specialist

Credits:

www.ftc.gov

www.creditcard.com

www.money.com

www.cbsnews.com