While credit and debit cards appear to be very similar, and you use them in a lot of the same ways, what happens after you use the card is completely different. With debit cards, the amount of a purchase is deducted directly from your bank account balance. But when you use a credit card, the amounts you spend are recorded, appear on your monthly statement, and must be paid back in full by the due date to avoid interest charges. There are some other differences that go beyond how the cards work:
Cash Withdrawals. In addition to purchases, debit cards are designed for cash withdrawals. If you use a machine within your bank network, you usually won’t pay any fees. But with a credit card, as soon as you withdraw the money, you’ll pay an upfront fee for the advance. And you’ll begin to accumulate a finance charge at a rate higher than your card’s APR (which is the rate you pay on purchases.)
Consumer Protections. Another difference between debit and credit cards is that if you buy defective merchandise with a debit card, you can’t withhold payment while your complaint is resolved. You’ve already paid. In contrast, your credit card provider will let you withhold payment while it investigates your claims in cases where you feel you shouldn’t have to pay. With a debit card, you have to investigate yourself, and there’s no assurance you’ll succeed in getting a refund.
Credit History. There is one area in which credit cards offer a real benefit that you don’t get with debit cards. Using a debit card to pay for purchases doesn’t help you build a strong credit history, since you’re not using credit. Of course, a strong credit history is not a guarantee when you are using a credit card. You still need to pay your bill on time, and pay it in full if you can.
Unlike a regular debit card, which gives you access to the amount in your checking account, a prepaid card is loaded with a certain amount of money. When that money has been spent, the card must either be reloaded or replaced.
Not all prepaid debit cards are created equal. Some have high fees that eat away at your balance. Not all provide consumer protections, such as replacing the value on a lost or stolen card. And some can be used in only one store or chain of stores. So it’s important to pay attention to the details before buying one.