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!
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