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.
Each card works differently.
Learn about the differences between a debit, credit and prepaid card.
Quick Guide for Consumers on Credit, Debit & Prepaid Cards
Quick Guide for Consumers on Credit, Debit & 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 the balance is 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
Quick Guide - Consumer Protections Available
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.
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.
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 45 days notice before making significant changes to the account, such as changes to the interest rate or fees charged.
Financial institutions must provide 21 days notice before making changes to fees charged or the liability limits for unauthorized transactions.
Payroll cards must provide 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
Debit card – With a debit card, you spend money linked to your checking or savings account. Debit cards usually do not incur interest charges when used.
Credit Card – With a credit card, you borrow money that must be paid back. If the balance is not fully paid when due, you will incur interest charges and possible fees.
Prepaid Card – With a prepaid card, you spend money loaded onto the card. Some prepaid cards are reloadable; others are gift cards with a fixed value.
Watch for fees
You may be charged an overdraft fee if you use a debit card for a purchase and don’t have enough funds in your account, even if you authorized overdraft protection. With overdraft protection, your financial institution may allow the transaction to clear in spite of insufficient funds in your account. You can revoke this authorization at any time if you don't want to risk paying these fees. As a result, future debit card transactions will be declined if you don't have enough funds in your account.
Although you can opt-out of overdraft protection and prevent related fees, your financial institution may charge other fees if you do not have enough funds in your account to clear the transactions. For example, a non-sufficient funds or NSF fee is common.
If you use a credit card, pay close attention to your spending habits. Credit card issuers charge many kinds of fees, and most of them are avoidable. Your credit card agreement will list these fees and when they are charged.
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 see if a copy is posted on its website.
Prepaid cards are sometimes marketed with celebrity endorsements and promotional offers. While these offers seem attractive, be aware that you may have to pay various fees, including a monthly surcharge, charges to load funds onto the card, and fees per transaction.
There is an alternative to a traditional checking account or prepaid card. If you don't want to write checks but do want to make electronic transactions, you may want to consider opening a "checkless" transaction account. This alternative 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
For a debit card, federal law limits your losses to a maximum of $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, you could lose much more. Federal law limits your losses to a maximum of $50, if a credit card is lost or stolen.
Your liability for fraudulent use of a prepaid card 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 account numbers or other personally identifying information in response to a phone call, e-mail, text message, or other communication you didn't originate. Periodically review your account statement for unauthorized transactions.