Close up of senior woman's hands with laptop computer and credit card.When you go to pay for a purchase at your favorite store and the cashier asks you “debit or credit?” which do you say? If you’re a senior, do you know the difference? If not, you may find yourself in financial trouble if you don’t answer correctly.

Debit cards are a relatively recent consumer financial tool and they’ve rapidly grown in popularity. Many elderly individuals are not used to making choices between debit and credit cards, so it’s important to know the difference.

Debit and credit cards: they look alike, but they’re different

Most of us have a wallet or purse with a bunch of shiny plastic cards that all look pretty much alike. All the big financial companies such as Mastercard, VISA, and American Express offer both credit and debit cards. They all have 16-digit account numbers, PIN codes, a little signature line on the back, and card expiration dates. But that’s where the similarity ends between debit and credit cards.

Debit cards allow bank customers to spend money by drawing on funds deposited with the card provider. Many banks offering checking accounts routinely offer debit cards as a courtesy to their customers so they can access their funds without having to write a check which some stores may not accept.

Credit cards allow consumers to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash. They are not tied to an account with money in it, such as a checking account. Instead, the issuer allows the customer to borrow money up to a certain amount using their credit card. You are then responsible for paying that borrowed money back within a certain period of time, with interest added on if the balance is not paid in full at the end of the month.

Individuals with a good credit rating and a sense of responsibility can often use a credit card without a problem. They understand they’re responsible for their spending and can limit themselves to an amount that they can reasonably pay off without creating a financial burden for themselves.

Debit cards limit purchases to the amount of money in the account tied to the card. Once that money is spent, the card is no longer usable until more money is deposited. This is a good choice for anyone who may have trouble controlling their spending and runs the risk of running up a huge credit card bill that can be difficult to pay off.

Which is right for you?

Frugal consumers such as seniors on a fixed income and budget prefer to use debit cards because they usually have few or no fees of any kind, unless users spend more than they have in their account and incur an overdraft fee. The no-fee advantage doesn’t hold for prepaid debit cards, which frequently charge activation and usage fees, among other costs. By contrast, credit cards generally charge annual fees, over-limit fees, late-payment fees and a number of other fees and penalties, in addition to monthly interest on the card’s outstanding balance. Compulsive spenders would do well to use debit cards and avoid the temptation of credit.

However, responsible credit card users can reap cash, discounts, travel points and many other perks unavailable to debit card holders by using rewards cards. Smart consumers who can pay off their cards in full and on time every month can profit substantially by running their monthly purchases and bills through them.

Credit card use is also reflected on the customer’s credit report, which allows responsible spenders to raise their scores with a history of timely payments.

Credit cards can also provide additional warranties or insurance for items purchased that may exceed those of the retailer. If an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, for example, it’s worth checking with the card company to see if it will provide coverage.

Credit cards still offer much greater protection in most cases for those whose cards are lost or stolen. As long as the customer reports the loss or theft in a timely manner, his/her maximum liability for purchases made after the card disappeared is $50. The Electronic Funds Transfer Act gives debit card customers the same protection from loss or theft – but only if the customer reports it within 48 hours of discovery. After 48 hours, the customer’s liability rises to $500; after 60 days there is no limit.

Smart seniors who can control their spending are probably wise to reap the benefits offered by credit cards for the majority of their purchases. Debit cards protect the frugal from fees and ensure that less disciplined spenders stay within their means. For more information on the proper use of credit and debit cards, it’s a good idea to consult your bank or financial advisor.

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