Debit, Credit or Prepaid Card?

Debit, Credit and Prepaid Cards: Know the Differences

Many consumers use debit, credit and prepaid cards, often interchangeably, to purchase goods and services. However, these three types of cards are quite different. Consider the following.

Each card works differently.

  • Credit Card - You are borrowing money that you must pay back, in addition to interest, if you do not pay the balance in full by the due date.
  • Debit card - Issued by your financial institution and linked to your checking or savings account, the money taken from the account is yours and you will never incur interest charges.
  • Prepaid Card - You are spending the money deposited onto them, and they usually aren't linked to your checking/share draft or savings/share account. Prepaid products include "general-purpose reloadable" cards, which display a network brand such as American Express, Discover, MasterCard, or Visa; gift cards for purchases at stores; and payroll cards for employer deposits of salary or government benefit payments. Be aware of the possibility of unanticipated fees and, with certain types of these cards, the potential for limited consumer protections against unauthorized transactions.

Watch for fees.

You may be charged an overdraft fee if you use a debit card for a purchase, but there aren't enough funds in the account and you have given your financial institution written permission to charge you for allowing the transaction to go through (overdraft protection). You can revoke the authorization to pay overdraft fees if you don't want to risk paying them, and future debit card transactions will be declined if you don't have the funds in your account. Similarly, a credit card issuer may decline a transaction that puts you over your credit limit unless you have explicitly agreed to pay a fee to permit over-the-limit transactions.

You should contact your financial institution for further information if you wish to choose this option. Although you can opt-out of overdraft protection and prevent this fee, there may other fees that your financial institution may charge if you do not have funds in your account for other types of transactions, such as a non-sufficient funds or NSF fee.

In any case, it is best to review the disclosures you received when you opened your account, including the fee schedule. If you have misplaced or lost your copy, you can always contact your financial institution, or there may be a copy online.

Prepaid cards are sometimes marketed with celebrity endorsements and promotional offers. While these offers seem attractive, be aware that you may have to pay for various fees, including a monthly surcharge, charges to load funds onto the card, and fees per transaction.

As an alternative to a traditional checking/share draft account or prepaid card, consumers who don't plan to write checks, but do want to do financial transactions electronically may want to consider opening a "checkless" transaction account that allows you to pay bills and make purchases online or with a debit card.

Your liability for an unauthorized transaction varies depending on the type of card.

Federal law limits your losses to a maximum of $50 if a credit card is lost or stolen. For a debit card, your maximum liability under federal law is $50 if you notify your financial institution within two business days after learning of the loss or theft of your card. But, if you notify your financial institution after those first two days, under the law you could lose much more.

Your liability for the fraudulent use of a prepaid card currently differs depending on the type of card. Federal law treats payroll cards the same as debit cards, but currently there are no federal consumer protections limiting your losses with other general-purpose, reloadable prepaid cards and store gift cards.

For all cards, industry practices may further limit your losses, so check with your card issuer.

Also, take steps to guard any cards from thieves. Never provide any numbers in response to an unsolicited phone call, e-mail, text message, or other communication you didn't originate. Immediately review your statement for unauthorized transactions.

Quick Guide for Consumers on Credit, Debit & Prepaid Cards

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Credit Cards Debit Cards Prepaid Cards
What it is A credit card is a loan. A debit card is linked to your credit union or bank account and is issued by your financial institution. There are a variety of prepaid cards, including "general purpose reloadable" (GPR) cards which carry a brand of a card network (such as Visa or MasterCard) and can be used where that brand is accepted. Payroll cards and gift cards are two other types of prepaid cards.
How it Works When you borrow funds using a credit card, you must pay the money back. You may also have to pay interest if not paid in full by the payment due date. Credit cards may be especially useful if you want to pay for things when your credit union or bank account balance is low or to take advantage of a no-interest introductory period. When you use a debit card, the money spent is taken directly from your credit union or bank account. Debit cards may be especially useful for small and routine purchases, but they are considered less beneficial than credit cards for major purchases or buying items online because of the more limited protections in cases of unauthorized transactions or disputes. Prepaid cards, which generally allow consumers to spend only the money deposited onto them, can have a number of different features. For instance, some gift cards may be used only at a single merchant; most GPR cards may be used to pay for purchases and access cash at ATMs.

Consumer Protections Available

Credit Cards Debit Cards Prepaid Cards
Liability for Unauthorized Transactions Your liability for losses is limited to a maximum of $50 if your credit card is lost or stolen, although industry practices may further limit your losses. The maximum liability is $50 if you notify the financial institution within two business days after discovering an unauthorized transaction. But if you notify your financial institution after those first two days, you could lose up to $500, or perhaps much more. Liability depends on the type of funds on the card. If the card is a payroll card, then the liability rules are the same as for debit cards. But if the card is a general purpose reloadable card or a gift card, then there are no protections to limit your liability under federal law.
Disclosures Credit card solicitations must disclose certain information, including the annual percentage rate (APR), variable rate (if any), penalty rate, fees, and other transaction charges. Financial institutions must disclose any fees associated with using the debit card as well as its error resolution process. Disclosures depend on the type of card. For example, payroll cards must disclose any fees and the error resolution process, but a GPR card does not have any disclosure requirements. In addition, gift cards must disclose the terms of dormancy fees, whether there is an expiration date, and any other associated fees.
Periodic Statements Credit card issuers must provide a periodic statement for each billing cycle where the account balance is $1 or more at the end of that cycle or where interest has been charged. Financial institutions must provide a statement for each monthly cycle in which a transaction has occurred. If there have been no transactions, then a statement must be sent quarterly. Payroll cards must provide either a periodic statement or account balance by telephone as well as electronic transaction history. GPR cards and gift cards do not have periodic statement requirements under federal law.
Change in Terms Credit card issuers must provide a 45 days notice before making significant changes to the account, such as changes to the interest rate or fees charged. Financial institutions must provide a 21 days notice before making changes to fees charged or the liability limits for unauthorized transactions. Payroll cards must provide a 21 days notice before making changes to fees charged or the liability limits for unauthorized transactions. GPR cards and gift cards are not required to do so under federal law.
Interest Rate and Fee Limits Generally, credit card issuers cannot increase the annual percentage rate (APR) or fees within the first year of account opening (although there are some exceptions to this rule). Card issuers must also reevaluate any interest rate increase every 6 months. There are no specific requirements related to debit cards. GPR cards and gift cards have certain restrictions on dormancy fees charged. There are no specific requirements related to payroll cards under federal law.

Courtesy of the Federal Deposit Insurance Corporation

To learn more about the three types of payment cards, visit www.fdic.gov/consumers/consumer/information/ncpw/index.html