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

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