Debit, credit and prepaid cards are different

Debit, credit and prepaid cards each have different rules that govern their use. They shouldn’t be thought of or used interchangeably.

Many consumers think of debit, credit and prepaid cards as interchangeable and use them in that way when making purchases. But these three types of cards are quite different.

Each card works differently. If you use a credit card to pay for a purchase you are borrowing money that you must pay back – in addition to interest – if you don’t pay the balance in full by the due date. If you use a debit card which is linked to your checking or savings account, the money taken out of the account is yours and you will never pay interest charges on it. With the prepaid card you are spending money deposited onto it and it is usually not linked to a checking of savings account. Be aware of the possibility of fees on these cards and the possibility of limited protection against unauthorized transactions in case it is lost or stolen.

The kind and amount of fees paid differ as well. You may be charged an overdraft fee if you use a debit card for a purchase and there isn’t enough money in your account. However, this can only happen if you have given your bank written permission to charge you for allowing the transaction to go through. You can revoke that authorization at any time. If you revoke this authorization future debit card transactions will be declined if there aren’t enough funds in your account to cover the transaction. Credit card issuers may also decline a transaction that puts you over the credit limit unless you have agreed to pay an over the limit transaction fee. Prepaid cards may come with a monthly fee, charges for loading funds onto the card or even a fee for each transaction you make with the card.

The amount of liability for loss also differs from card to card. Federal law limits your losses to a maximum of $50 if your credit card is lost or stolen. For debit cards your maximum liability is $50 if you notify your bank within two business days after learning of the loss or theft. If you wait until after those first two days you loss could be much more. Currently there are no federal consumer protections limiting losses with general-purpose, reloadable prepaid cards or store gift cards. However, the card issuer may have protection that limits your loss so check with them if such a loss occurs.

To learn more about the three types of payment cards and the laws that govern their use you can visit the Federal Deposit Insurance Corporation’s website or contact a financial literacy educator with Michigan State University Extension. To find an educator in your area, visit http://expert.msue.msu.edu/ or call 888-MSUE4MI (888-678-3464).

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