In support of National Consumer Protection Week 2021, the Receivables Management Association International (RMAI) provides the following information. Additional information on this topic and more is available online from the Consumer Financial Protection Bureau. Visit RMAI’s webpage for Consumers for more National Consumer Protection Week articles about avoiding scams, shopping online, and finding help for rent and mortgage payments.
Credit cards and debit cards are tricky. They look the same but behave differently. Credit cards allow you to use other people’s money. Debit cards only let you to spend your own money.
How a Credit Card Works: Before you can get a credit card, you will have to complete a credit application. If you satisfy the bank, credit union or store card’s minimum requirements, you will be given a card with a credit limit. A credit limit is the amount the card company will let you charge on the card at any given time. For example, people who have a lot of expenses compared to the amount of money they earn, may be given a card limit of $1000 to $2500. Others, who make more money and have a history of paying their bills on time, may be granted a much higher credit limit such as $10,000.
No matter what your card limit may be, you have to pay the money back. Each month, at the end of a period called a billing cycle, the card company will send you a statement. The statement lists all of the items you charged using your card during the past month and includes the amount you must pay back so you are not charged interest. Interest is an amount of money equal to a percentage of the amount you owe the card company and did not pay back at the end of the billing cycle. For example, if your card statement indicates the balance due on a certain date is $500, and you only pay $200 of the $500 you owe, the company will charge you interest on the remaining $300. Note also, at the very least, you must make the minimum payment due on your card each month.
When you pay the total amount you charge on your card within a billing cycle on time, you will never have to pay interest to the card company, and you will be considered a good credit risk. This will help you qualify for other types of credit such as a home loan, a car loan or even other credit cards.
How a Debit Card Works: A debit card is a payment card that deducts money directly from your checking account to pay for a purchase. Debit cards eliminate the need to carry cash or physical checks to make purchases directly from your bank account. Debit cards, also called “check cards,” offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors such as Visa or Mastercard.
Debit cards do not allow the user to go into debt, except perhaps for small negative balances that might be incurred if the account holder has signed up for overdraft protection. Debit cards usually have daily purchase limits, meaning it may not be possible to make an especially large purchase with a debit card.
When you use a debit card, the money is automatically taken out of your checking account. When you use a credit card, you pay the bill later. You cannot use your debit card if your bank account is empty, but you can use a credit card. A debit card is simply a tool to use in place of a check or actual cash. You are borrowing money when you use a credit card. When you use a debit card, you are using your funds.
Many people find having both kinds of cards serves them well. Using a credit card instead of using a debit card is sometimes the only option we have to pay for an emergency or unforeseeable expense we cannot cover with the money in the bank or the cash in our wallet. Using a credit card may also be the best way to protect yourself from someone stealing your debit card and depleting the money in your account. This is because if someone steals your debit card and takes funds out of your account, it may be more difficult and take longer to get the funds back from the thief than if someone steals your credit card. When a credit card is stolen and you report the card as stolen, your liability for unauthorized charges is limited.
The Consumer Financial Protection Bureau provides a wealth of information about choosing the right card for you. Visit www.cfpb.gov to learn more about important key terms such as:
- Annual Percentage Rate (APR)
- Balance transfer
- Credit balance
- Daily periodic rate
- Grace period
- Interest rate
- Prescreened credit card offer
- Unauthorized use
- Explore key terms
About the Bureau
The Consumer Financial Protection Bureau is a 21st-century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.
About Receivables Management Association International
Receivables Management Association International (RMAI) is a nonprofit trade association representing more than 550 companies that purchase or support the purchase of performing and nonperforming receivables on the secondary market. The Receivables Management Certification Program and Code of Ethics set the global standard within the receivables industry due to the rigorous uniform standards of best practice which focus on protecting consumers. More information about RMAI is available at www.rmaintl.org.