Debit, Credit and Prepaid Cards: There Are Differences

Tuesday, October 29 at 11:55 AM
Category: Personal Finance

Many consumers use debit, credit and prepaid cards interchangeably to purchase goods and services. However, you should be aware these three types of cards are quite different and each card works differently.

Prepaid cards
With prepaid cards you are spending the money credited onto the card, and it usually isn’t linked to your checking or savings 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. Make sure you understand any fees and consumer protections against unauthorized transactions.

Prepaid cards are sometimes marketed with celebrity endorsements and promotional offers but you may have to pay various fees on the card. These costs may include monthly fees, charges for loading funds onto the card, fees for each transaction and inactivity fees. Again, you should have a good understanding of the fee structure before requesting a prepaid card.

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.

Debit cards
If you use a debit card, which is linked to your checking or savings account, then the money taken from the account is yours and you will never incur interest charges.

You may incur a fee if you access your overdraft protection. You can always decline or revoke overdraft protection if you don't want to risk incurring these fees, but future debit card transactions will be declined if you don't have the funds in your account. Keep in mind, removing overdraft protection on any account does not eliminate the possibility of incurring an overdraft fee. You should discuss this with your bank to have a good understanding of how your overdraft protection works.
As an alternative to a traditional checking account or prepaid card, consumers who don't plan to write checks, but do want to bank 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. For a debit card, your maximum liability under federal law is $50 if you notify your bank within two business days after learning of the loss or theft of your card. If you notify your bank after those first two days, then under the law you could lose as much as $500. If your card has not been lost or stolen but you notice unauthorized transactions on your periodic statement, then you should notify your bank within 60 calendar days from the date the bank sent the statement. If you don’t notify the bank within the 60-day period, then you may be liable for any unauthorized transactions that happen after the 60th day and/or up to the date you first notify the bank.

Credit cards
If you use a credit card, then you are borrowing money you must pay back. If you do not pay the balance in full by the due date, then you will also pay interest.

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. Make sure you understand the fee structure associated with your credit card for late payments, any applicable over-limit fees, etc.

With a Visa or MasterCard, the cardholder has $0 liability for unauthorized transactions unless the company determines the cardholder was negligent. 

Stay safe
Regardless of the type of card you use, take steps to guard any cards from thieves. Never provide any numbers in response to an unsolicited phone call, email, text message or other communication you didn't originate. Immediately review your statement for unauthorized transactions.

To learn more about the three types of payment cards, visit www.fdic.gov.*

Links marked with * go to a third-party site not operated or endorsed by Arvest Bank, an FDIC-insured institution.

Tags: Credit Cards, Debit Cards, Financial Education
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