Credit cards, debit cards, stored value cards: What’s the difference?

Credit cards are not a form of money, even though people often refer to them as “plastic
money.” When you use a credit card you are actually taking out a loan buying something now
and agreeing to pay for it later and sooner or later you will have to pay the bill for all those
things you’ve bought.

Many banks issue credit cards, even to people who aren’t regular customers. Before issuing you
a credit card, a bank will require you to complete an application form and will examine your
credit record to see if you have a history of paying back your debts on time.

Sometimes people run up credit card bills that are too big to pay off every month. When that
happens, they must pay a monthly finance charge that can sometimes top 20 percent a year.

In addition, banks (and other companies that issue credit cards) sometimes charge their
cardholders an annual fee.

They also charge merchants a fee for making the credit card service available. Finance charges,
annual fees, and merchant fees have become an important source of income for banks.

Debit cards look like credit cards, but they are very different. When you use a debit card at
the gas pump or at a store, the amount of the purchase is electronically deducted from your
bank balance. It will show up on your monthly bank statement, but there’s no monthly bill
because the amount of each purchase is deducted almost immediately from your account.

Some merchants offer you the opportunity to get additional cash back when you pay for a
purchase with your debit card. You can also use your debit card at an ATM if you need to
withdraw cash from your account, but if the ATM is not part of your bank’s network, you may
have to pay a fee.

One other major difference between debit cards and credit cards is that you don’t have as
much legal protection if your debit card is lost or stolen. On a lost or stolen credit card, the
most you’re responsible for is $50. But if someone steals your debit card, you could be
responsible for up to $500 in fraudulent charges or transfers unless you report the loss or theft
of your card within two business days.

You risk unlimited loss if an unauthorized charge or withdrawal appears on your statement, and you don’t report it within 60 days. So always be
sure to check your monthly bank statements!

The card that may come closest to being “plastic money” is the stored value card. Gift cards
and phone cards are the two types that most people know best. The cards are “loaded” with
a certain dollar amount—$10, $50, $100, or any other amount—and that amount decreases
with each use. For example, if someone gives you a $50 gift card to Bob’s Big Buy, and you buy
something there for $30, you will still have $20 “stored” on the card.

Two things to keep in mind about stored value cards:

1. You can’t use them in as many places as credit cards or debit cards. If you receive a gift card to Bob’s Big Buy, that’s the only place you can use it, and


2. They really are “just like cash” in that you’re pretty much out of luck if they are lost or stolen.

When you use a credit card you are actually taking out a loan buying something now,
and agreeing to pay for it later.

Source from : http://www.bos.frb.org