By: José S. Canto
Personal Financial Advisor
E-mail: joseca@cwpanama.net

Debit cards are relatively new and its use is also experiencing remarkable growth. Physically, both types of cards are the same: a plastic card with a logo or symbol of a bank or other financial institution and the brand name. On credit cards, a 16-digit number and the cardholder’s name appear embossed on the plastic. On the reverse side of the card, on its upper half, there is a magnetic stripe that contains all the information related to the account. This information can be read today by a special reader at most merchants, stores, and ATMs. The question that readers of this article could be pondering is: What is the basic difference between a credit and debit card? This is easily answered if we ask ourselves who holds the funds we draw on when using one or the other.

When you use a credit card, the available funds you draw on belong to the bank that issued the card. When you use this card, you make use of credit, which has a cost. Essentially, you incur debt, because you will have to pay financing charges for the use of capital, interest, annual membership fees, insurance and other costs, depending on the financial institution.

In the case of a debit card, the funds you draw on are yours. In fact, the card is a tool that makes it easy to access your money, anytime and anywhere you need it, in cash via ATMs or by purchasing items in merchants, stores, etc.

In order to use a debit card, you must first open a savings or checking accounts in a bank, request a debit card, be assigned a PIN (Personal Identification Number), which only you know and with which you will have access to your funds, withdraw cash, make payments, check your account balance, transfer funds, etc. Take good care of the debit card and avoid using it in poorly lit ATMs. Do not allow strangers, if you encounter problems during a transaction, to ‘help’ you. They may very well steal your PIN and card for illegal purposes.

The best advice we can give you is to use extreme caution when using a debit card to withdraw cash from ATMs.

If you tend to forget things and have a lot of "plastic" with different PINs, keep these saved as telephone numbers on your cell phone. Use numbers and names that only you are familiar with. Remember also that all businesses are required by the banks to ask for personal identification to verify that in effect the card belongs to you. This is for your own protection and to reduce debit card fraud.

Debit cards offer many advantages for cardholders, as well as for the retailer and banker. They offer unlimited access to funds for the client, and this availability provides more safety than handling large amounts of cash and risk losing it if banks are closed. The PIN is a key factor in respect to confidentiality and security, which increases the level of advantages for the user. For the retailer, the PIN increases the level of security by avoiding the handling of cash at the register, whereas it reduces the possibility of counterfeit money, non-sufficient funds checks, or other problems. It also allows the bank to take better care of its clients by making available longer banking schedules and offering them more independence, simultaneously reducing operating costs, among other advantages.

The debit card is recharged by means of deposits in the individual bank account, by transferring funds from one account to another, by depositing money, or from wages deposited in the employees’ account by the employers on a bi-weekly or monthly basis.

In regards to credit cards, these are the same as far as the physical and operative characteristics. However, they vary depending on the costs and advantages offered by the issuing bank. The most notable differences are found in the interest rates, annual membership fees, and added benefits like miles, cash back offers, grace periods, method of monthly fee calculations, monthly fees, insurance costs, etc. If you are offered a lower rate to buy out your current balance, meaning that you transfer your credit card debt from one bank to the other, find out for how long the promotion is valid and the terms and conditions of the same. Do not forget to ask about the costs related to delinquent or late payments and for any cash withdrawals, as well as the insurance costs, etc.

If you plan to use your credit card to earn miles, but not to finance your purchases so as to avoid interest charges…fantastic! We congratulate you! This would be a good reason to choose a credit card. If on the contrary, you plan to finance your purchases, be careful not to incur in too much debt. It is very easy to pile on unmanageable debts as a result of the impulsive use of your credit card. Remember that your credit references are very important. Do not ignore the payments on these obligations and take control of your expenses.

If you are not very disciplined in managing your money and credit, we suggest you open a savings or checking accounts and request a debit card, so you can control your money more resourcefully. This advice will work given that if you do not have funds in your account, you do not have funds to spend. Thus, you will not incur in more debt. Remember, you may only use your debit card to buy items or withdraw cash in an ATM if you have available funds in your account.

On the other hand, do not forget that your savings and checking accounts have specific terms and conditions and are subject to laws that govern their administration by the bank and by your person. Read and understand the terms and conditions of each account and bank, so that you can avoid problems and other concerns and fully enjoy your money.

If you decide for either a credit or debit card, do not forget that good sense and financial discipline will always provide greater satisfaction and enjoyment.