The years of carrying a significant amount of cash are long gone. Paper bills and coins were replaced by credit cards, and a lot of them. Over time, the need for "specialty" cards waned as consumers decided it was time to streamline monthly payments. Today, there are really only two choices: a credit or a debit card.
In this article, we're going to talk about the differences between debit and credit cards. As part of that discussion, we'll briefly review the history of each card type. Next, we'll explain what it means to pay for something using credit versus debiting an account. Then we'll finish up with the advantages and disadvantages of each card.
Selling merchandise on "credit" has been around for many years. Customers would receive goods or services with the promise to pay for them at a future point in time. The modern-day credit card was first used to sell automobile fuel to consumers back in the 1920s. It wasn't until the 1960s when the plastic cards of today were mass marketed. Bank of America would first launch what was to become a "Visa" card. Several years later, "MasterCard" was launched to compete with Visa.
The history of debit cards, also known as check and bank cards, is less clear. Research indicates the first debit card appears to have been issued by the Bank of Delaware back in the 1960s. Cards became mainstream in the 1970s, and widespread use took hold in the late 1980s. While the introduction of debit cards coincides with credit cards, use by consumers was slow to develop, but rapidly accelerated in the early 2000's.
The popularity of credit cards grew out of consumer convenience and merchant acceptance. Consumers no longer had to worry about carrying large amounts of cash to pay for goods and services. Merchants liked the concept too. They no longer had to worry about handling as much cash, but they also benefited from impulse purchases by consumers too.
All cards are subject to what are called interchange or transaction fees. These fees are the "cost" of transferring funds between the merchant bank and the customer's bank (card issuer). Companies like Visa determine these fees, which often involve a fixed and variable component. For example, the interchange fee might be $0.25 per transaction plus 2% of the purchase price.
Generally, merchants prefer their customers use debit cards. That's because the interchange fees are usually lower than credit cards. The higher interchange fees associated with credit cards allow financial institutions to profitably market offers such as 1% cash back rewards.
The "behind the scenes" difference between using a credit and a debit card is very straightforward, and knowing how they differ will lead right into a discussion of the pros and cons for each card type.
If used responsibly, the choice is simple. Credit cards are not only convenient, but are offered with features such as reward programs and consumer protections that debit cards cannot match. Why are debit cards growing in popularity? It really comes down to discipline.
If abused, a credit card holder will eventually find themselves deep in debt. When multiple credit cards are used to support an overspending habit, the cardholder can find themselves owing tens of thousands of dollars. Debit cards allow these individuals to regain control over their spending habits, and consume responsibly.
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