How are credit cards and debit cards used?

While you’ve probably used debit and credit cards in your home country, there are some unique aspects about how they’re used in the United States. In order to use bank cards safely, it’s important to learn about these nuances.

Credit and debit cards have become the most common way for people in the U.S. to make purchases both online and in person. Over the decades, restaurants, retailers, and supermarkets have increasingly computerized their financial systems to accommodate card payments.

This also makes the life of the consumer easier by offering a way to make purchases without the need to carry large amounts of cash.

Additionally, credit and debit cards offer security features that cash transactions lack. For example, they protect against fraud, theft, and unauthorized transactions, and many cards come with features like Europay, Mastercard, and Visa (EMV) chips and Personal Identification Numbers (PIN) for added security.

Unlike cash, if a credit or debit card is lost or stolen, it can be quickly reported to the issuer, and the card can be deactivated to prevent unauthorized use. Plus, you may be able to get your money reimbursed if an unauthorized payment is made with your credit card.

Beyond security, credit cards play an important role in helping people establish a positive credit history and improve their ability to borrow money in the future. Then, depending on which card program you choose, many credit and some debit cards offer rewards programs, cash-back, or skymiles for cardholders.

All in all, credit and debit cards are an essential part of financial life in the U.S. To get a better idea of how credit and debit cards work, let’s take a closer look at their common features and uses.

In this guide, we will answer the following questions:

• What is a credit card?
• What is a debit card?
• What’s the difference between credit cards and debit cards?
• What’s the relationship between physical cards and online payments?
• What is a credit limit?
• What are credit card fees?
• What is credit card interest?
• What are credit card rewards programs?
• How can I keep my bank cards safe?
• What if my bank cards are lost, stolen, or compromised?

What is a credit card?

Credit cards function as a type of payment card that allows individuals to borrow money from a bank or credit card company. This borrowed money can be utilized for purchases at various establishments that accept credit card payments, including stores and restaurants.

When using a credit card, individuals are essentially committing to repay the borrowed funds to the bank or credit card company. The institution keeps a record of the amount you owe and requires you to make a minimum monthly payment on the card. Of course, you can completely repay the card at any time you want.

It’s really important to note that the bank or credit card company imposes interest charges, which is a fee for borrowing money. The longer it takes to repay the borrowed amount, the higher the accumulated interest becomes.

What is a debit card?

Debit cards are another type of payment card, but they work differently from credit cards. When you use a debit card, you’re not borrowing money from a bank or company. Instead, you’re spending money directly from your own bank account.

You can use a debit card to make purchases at stores, restaurants, and other places that accept debit card payments. When you swipe your debit card or enter your card details online, the money is deducted directly from your checking account.

There’s no need to pay back any money to the bank because you’re using your own funds. However, it’s essential to keep track of your account balance to ensure you have enough money to cover your purchases.

Unlike credit cards, debit cards typically don’t charge interest because you’re not borrowing money. However, some banks may charge fees for certain transactions or if you overdraw your account, which means spending more money than you have available.

What’s the difference between credit cards and debit cards?

Debit and credit cards look almost exactly the same and they both allow users to make purchases without cash, but they operate on different principles.

Debit cards are directly linked to a checking account, with funds deducted immediately upon purchase. Users are limited to spending what’s available in their account, which avoids interest charges because there’s no borrowing involved. These cards also allow cash withdrawals and usually offer fewer rewards compared to credit cards.

On the other hand, credit cards offer a line of credit, allowing users to borrow money up to a set limit from the card issuer. Each purchase made represents a short-term loan that must be repaid, typically on a monthly basis. Using your card responsibly by making timely payments and maintaining low balances can enhance a person’s credit history and scores. Another added benefit is that credit cards often come with rewards programs and benefits like cash-back, travel insurance, or purchase protection.

In essence, despite their similar appearance, debit cards draw directly from available funds in a bank account, while credit cards entail borrowing from the issuer. While credit cards offer the opportunity to build credit and provide various rewards, they also carry the risk of accruing interest if balances are not paid in full.

What’s the relationship between physical cards and online payments?

The relationship between physical cards and online payments is an important part of everyday commerce. Physical credit and debit cards are used for transactions both in-person at brick-and-mortar stores, and online.

In terms of what’s physically included on the cards, both credit and debit cards typically feature a 16-digit card number, the cardholder’s name, an expiration date, and a 3-digit security code. This 3-digit code is usually called a Card Verification Value (CVV) or a Card Verification Code (CVC) and is used for online transactions to verify the card’s authenticity.

Physical card transactions involve the user presenting their card to a merchant who then processes the payment through a card reader. These transactions typically require the cardholder to enter a PIN or provide a signature for verification.

Online payments utilize the same card information but in a digital environment. Users enter their card details into secure payment forms on websites or mobile apps. The information is encrypted and transmitted to the payment processor for verification, with no physical card required.

Physical cards and online payments are closely linked through the use of card information for both types of transactions. So, when you check your bank statement to see the list of the things you’ve purchased with your credit or debit card, you’ll see online purchases and purchases made with your physical card in the same list.

What is a credit limit?

A credit limit is the maximum amount of money that a credit card issuer allows a cardholder to spend on their credit card. This limit is predetermined by the credit card issuer based on factors such as the cardholder’s creditworthiness, income, and credit history.

The credit card limit represents the total amount of funds available to the cardholder for purchases, cash advances, or balance transfers. Cardholders cannot spend more than their credit limit without facing consequences such as declined transactions or overlimit fees.

Credit card limits can vary widely depending on the individual’s financial profile and the type of credit card. Higher credit limits are typically offered to individuals with excellent credit scores and higher incomes, while individuals with limited credit history or lower incomes may receive lower credit limits.

A low credit card limit typically falls between $500 and $1,000, while a medium limit ranges from $2,000 to $5,000, and a high limit is $10,000 or more. These limits dictate the maximum amount a cardholder can borrow, affecting their purchasing flexibility.

It’s important for cardholders to manage their spending within their credit card limit to avoid exceeding it, which can result in additional fees, penalty interest rates, and potential negative impacts on their credit score. Additionally, responsible use of credit cards and timely repayment of balances can sometimes lead to increases in credit limits over time.

What are credit card fees?

Credit cards can come with various fees, depending on the card issuer and the specific terms of the card agreement. Here are some common types of fees associated with credit cards:

Annual Fee

Some credit cards charge an annual fee for the privilege of holding the card. This fee is typically charged once a year and can range from a few dollars to several hundred dollars, depending on the card’s benefits and features.

Interest Charges

If you carry a balance on your credit card from month to month, you’ll incur interest charges on the outstanding balance. The interest rate, also known as the Annual Percentage Rate (APR), can vary based on factors such as your credit score and the type of transactions you make.

Late Payment Fee

If you fail to make at least the minimum payment by the due date, you may be charged a late payment fee. This fee could range from $25 to $40.

Overlimit Fee

If you exceed your credit limit on the card, you may be charged an overlimit fee. However, it is important to note that by law, the fee can’t be greater than the amount you spend over your limit. So, if you only spend $20 over your credit limit, the fee cannot be more than $20.

Cash Advance Fee

When you use your credit card to withdraw cash from an ATM or make a cash equivalent transaction such as purchasing traveler’s checks, you may be charged a cash advance fee. This fee is typically higher than the fees associated with regular purchases and may also incur higher interest rates from the moment of the transaction.

Foreign Transaction Fee

If you use your credit card for transactions in a foreign currency or outside of your home country, you may be charged a foreign transaction fee. This fee is usually a percentage of the transaction amount and covers the cost of currency conversion and processing.

It’s also important to note that when you’re using a U.S. credit card abroad, you might encounter an option called “Dynamic Currency Conversion” (DCC). The way you’ll encounter this is either at an Automatic Teller Machine (ATM) when you’re withdrawing cash, or when using a point of sale (POS) system.

A POS system is any machine used to make credit card payments which you’ll encounter at grocery stores, coffee shops, and other businesses. You’ll often receive a prompt that reads something like “Select currency: [Local Currency] or [Your Home Currency].”

This service allows you to pay in U.S. dollars instead of the local currency. While it may seem convenient to know the exact amount you’re being charged in your home currency, this service usually means you’ll be charged a higher rate.

It is important to note that DCC is handled by the merchant’s bank or their payment processor, not your own bank. So, it’s almost always more cost-effective to opt for payment in the local currency and let your bank handle the currency conversion, as their rates are generally more favorable.

Balance Transfer Fee

If you transfer a balance from one credit card to another, you may be charged a balance transfer fee. This fee is typically a percentage of the amount transferred and may also have a minimum or maximum fee cap.

Returned Payment Fee

If a payment made on your credit card is returned unpaid, you may be charged a returned payment fee.

What is credit card interest?

In general, “interest” is what it costs for you to borrow money from a financial institution. This interest is usually explained as an annual percentage rate (APR).

When it comes specifically to credit cards, the APR and interest rate are typically the same. The terms “interest” and “APR” are often used interchangeably because a credit card’s interest rate and APR are almost always the same. But that’s not always true when it comes to other types of credit.

The main difference between interest and APR is that APR might also reflect other costs, including application fees, origination fees, and administrative fees. That’s why APR may be higher than the interest rate when it comes to some loans and credit lines. But let’s take a look specifically at credit card interest.

When do credit cards charge interest?

When you buy anything online or in person using a credit card, your bank or lender pays the merchant on your behalf. Afterward, you pay back your lender by paying your credit card bill with cash or a debit card.

If you don’t completely pay off your statement balance at the end of your billing cycle, then the unpaid part of the balance carries over into the next billing cycle. That’s called a “revolving balance”, and these revolving balances are how credit card users begin to accumulate interest.

So, if you want to pay less interest fees to your credit card company, focus on paying off what you owe as soon as possible. The easiest way to avoid interest is to pay the entire amount by the deadline. This way, you won’t have to pay as much extra money in interest charges or worry about accumulating compound interest.

How can I calculate my credit card interest?

Calculating APR on borrowed money can be a bit complex, especially when dealing with compound interest, which many credit card companies utilize. Let’s break down the process into simple steps.

Firstly, start by determining your daily interest rate. Since APR is an annual rate, you can divide it by 365 days per year to find the daily interest charged. For instance, if your credit card has a 20% APR, your daily interest rate would be approximately 0.055%. This calculation is reached by dividing 20% by 365 days, equaling 0.055.

Next, you’ll need to calculate your average daily balance. For example, if your monthly balance is $1,980, divide this total by the number of days in the billing cycle, which may be 31 days, resulting in an average daily balance of $64.

Finally, multiply the daily interest rate of 0.055% by the average daily balance of $64, equaling $3.52.

After that, you’ll multiply $3.52 by the number of days in the billing cycle, which we will imagine is 31 in this case. This calculation yields your interest charges for the month.

For instance, if your average daily balance is $64, the daily interest rate is 0.055%, and the billing cycle lasts 31 days, your interest on the monthly statement would be $109.12.

This is just one example, and it’s good to remember that each card issuer provides a full explanation of how your interest is calculated in your card’s terms and conditions.

Are there other types of credit card interest?

You’re probably already familiar with the purchase APR, which is the rate applied to purchases made with the card. However, your credit card may have other interest rates for different transactions like cash advances and balance transfers.

For starters, there may be a penalty APR charged if you make late payments or miss payments. Luckily, penalty APRs usually don’t apply during the grace period, and federal law mandates that credit card issuers give a 45-day notice before implementing them.

Sometimes, credit cards may also impose variable rate APRs. These are interest rates that may change over time depending on things like the economy and inflation. However, cardholder agreements are required to provide details on how these variable APRs may change. So when you’re signing up for a credit card, you can figure out if the interest rate could possibly change.

Another type of interest is a fixed-rate APR. These don’t change based on inflation or the economy, but they can still be modified by the organization that issued your credit card. Again, the credit card issuer is required to notify you before changing your fixed-rate APR.

Lastly, credit cards offer special rates or lower APRs as a one-time promotion. This is one of the most popular ways for credit card companies to gain attention and attract new business. These promotional or introductory rates may last for six months or one year, and they are designed to encourage new customers to sign up for credit cards. For example, a new credit card company might offer a promotional APR of 0% interest on balance transfers for the first 12 months or 5% cash-back on all purchases for the first three months. Then, after the promotional year period ends, the APR would return to the standard rate.

How can I avoid paying credit card interest?

While all credit cards will eventually charge you an interest, you can avoid paying interest if you’re responsible. By planning ahead and paying your statement on time you can essentially use your credit card to strengthen your credit score without paying interest. Let’s look at the best ways to avoid paying interest.

Find a card with a low interest rate

If you’ve maintained a good credit score, you could be eligible for a credit card offering a reduced interest rate. Opting for a card with a lower interest rate can help minimize the amount you pay in interest if you carry a balance.

Pay off your balance completely each billing cycle

If it’s possible for you, paying off your balance can significantly reduce the interest you accrue compared to carrying a balance from month to month. If paying in full isn’t feasible, make a goal to pay as much as you can. At the very least, make sure to pay the minimum payment required by your card issuer. Remember, the more you carry over each month, the more interest you’ll end up paying, which could also affect your credit score.

Make payments quickly

You don’t need to wait until the end of the billing cycle to make a payment. Paying earlier or more frequently throughout the month can help minimize interest charges, especially if you’re carrying a balance and can’t pay it off entirely each month. Setting up automatic payments can also ensure you meet your payment deadlines.

Consider a credit card offering a 0% introductory rate

Applying for a credit card with a 0% introductory APR on purchases can be advantageous if you’re seeking credit. However, be mindful of when the promotional period ends, as the APR will transition to the standard rate outlined in the card’s terms at that time.

What are credit card rewards programs?

A rewards credit card offers more than just the standard benefits of a regular credit card. Each time you use your card for purchases, you receive some form of “reward” for every dollar spent. These programs can be a great way to earn extra value on everyday spending.

The three primary types of rewards you’ll find are cash-back, points, and airline miles.

Cash-back

Cash-back rewards are like a little bonus you get when you buy things using your credit card. This reward is typically a small percentage of the purchase amount. How much you get back depends on the card you have. Some cards give you the same bonus rate on everything you buy, while others give you more back for certain types of purchases.

For example, let’s say you buy groceries with a cash-back credit card. With some cards, you might get 1% of what you spent back as cash, while with others, you might get 2% or even more. Some cards change the categories that get extra cash-back every few months, like groceries one quarter and gas stations the next. Others stick to the same bonus rate all the time.

So, if you buy a lot of groceries or gas, you might want a card that gives you extra cash-back on those things. Once you’ve earned some cash-back, you can usually use it in different ways, like getting a discount on your credit card bill, having the money deposited directly into your bank account, or getting a gift card to your favorite store.

Points

Reward points are a form of incentive that you earn by making purchases, especially in specific categories like dining, travel, and gas. You can accumulate points through bonus promotions or regular spending. It’s important to note that different cards offer varying rewards rates for different categories, so it’s wise to research and choose a card that aligns with your spending habits.

With a rewards credit card, you might earn 1 point for every dollar you spend. Some cards offer even more generous rewards, like 2 to 5 points for every dollar spent on travel, dining, and other categories such as department stores and grocery stores.

Miles

Some credit cards partner with airlines and reward you with points known as “miles.” These miles can be redeemed for future travel expenses such as flights and hotels.

You can earn miles by using your credit card for a variety of purchases. Yet sometimes, there are increased earning rates applied to travel expenses like flights and sometimes for dining and everyday spending as well. You can check the terms and conditions of a skymiles credit card to see which categories of spending earn more points.

For example, let’s say you use your credit card to purchase a flight. You might earn one mile for every dollar spent. However, if you use the same card to dine out, you could earn two miles for every dollar spent. These miles accumulate in your card’s rewards program and can be redeemed for a variety of rewards, including flights, hotel stays, cash-back, gift cards, and merchandise.

Redemption options are typically available online or through customer service assistance. Some of the most common airline mile credit card reward programs are Delta SkyMiles, United MileagePlus, and American Airlines AAdvantage. These airline miles can be especially beneficial if you’ve immigrated to the United States. Oftentimes, you’ll be able to use these rewards miles to buy flights to visit your family in your home country, or to buy a flight for a family member to visit you in the States.

Keep in mind that rewards programs come with specific rules for redeeming your rewards. Depending on your card, points can be used in various ways, and there may be limitations on what you can redeem them for. Some credit card issuers may require you to redeem rewards through their designated portal.

How can I keep my bank cards safe?

To ensure your bank cards and personal information are safe, it’s crucial to take proactive measures. Here are five strategies to help keep your credit cards secure:

Be careful from the beginning

It’s important to start with strong security measures to prevent identity theft and credit card fraud. Create a secure password and PIN, avoiding combinations that can be guessed easily, like “0000” or “1234.” While it may be easier to remember these PINs, it’s easier for thieves to guess them. Activate your account alerts to receive notifications of suspicious activity, and sign the back of your card as soon as you receive it.

Be cautious with account information

Be careful about sharing sensitive account details, as they could end up in the wrong hands. Avoid emailing credit card numbers or account information, and be discreet when providing such details over the phone. Never disclose your social security number for simple purchases, and consider shredding old statements and bills to prevent thieves from finding this information in your trash.

Look out for skimming

Be cautious of skimming devices that fraudsters may install on ATMs or point-of-sale terminals to steal your card information. Skimming involves illegally capturing data from the magnetic stripe of your card, which can then be used to create counterfeit cards or make unauthorized purchases. Before using an ATM or card reader, inspect it for any signs of tampering, such as loose parts or unusual attachments. If something looks suspicious, it’s best to use a different machine or report your concerns to the appropriate authorities.

Maintain online security

Practice safe online shopping habits by avoiding storing credit card information on websites. For example, Instead of saving your credit card details on websites for faster checkout, you can opt to enter them manually each time you make a purchase. This way, even if a website’s security is compromised, your sensitive information won’t be at risk of being accessed by unauthorized parties. Furthermore, transactions can only be made on secure, HTTPS-enabled platforms.

Stay vigilant against phishing attempts

“Phishing” refers to fraudulent attempts to steal account information through deceptive emails or links. For example, you might receive an email claiming to be from your bank, asking you to verify your account details by clicking on a link. Be cautious of such emails because legitimate institutions typically don’t request sensitive information through email. If you’re still in doubt, directly contact the organization that the email claimed to be associated with to verify the request.

Report fraud right away

If you notice anything suspicious with your account, inform your bank immediately to minimize potential harm. If you receive unusual emails or phone calls, report them promptly to your bank. Look over your receipts carefully for any charges that you didn’t make. Safely dispose of old receipts, and keep an updated list of your credit cards and bank contact information for quick reference in case of theft or fraud. Remember, in many cases, you may be able to have your money reimbursed if you promptly report fraudulent activity.

Following these tips and staying alert can help keep your credit card accounts secure and protect your personal information from possible dangers.

What if my bank cards are lost, stolen, or compromised?

If your credit or debit card is lost, stolen, or the information is compromised, there are several steps you can take. Let’s take a closer look at a few.

Report the loss or theft immediately

Contact your bank or credit card issuer as soon as you realize your card is missing. Most financial institutions have 24/7 customer service lines for reporting lost or stolen cards. By reporting promptly, you can minimize the risk of unauthorized charges on your account and potentially have your money reimbursed.

Monitor your account

Keep a close eye on your bank and credit card statements for any unauthorized transactions. Many banks and credit card companies offer online or mobile banking apps that allow you to monitor your account activity in real-time. Report any suspicious transactions to your bank or credit card issuer immediately.

Cancel the card

If you’re unable to locate your card and believe it has been stolen, ask your bank or credit card issuer to cancel the card and issue you a new one. They will deactivate the compromised card to prevent further unauthorized use. You may also have the option to cancel your card through your online account or mobile dating app.

Update automatic payments

If you have any automatic payments set up with your lost or stolen card, make sure to update the payment information with your new card details to avoid any disruptions in service. For example, if your cell phone provider is set up to regularly charge your credit card for service, you will provide them with a new credit card number. Or, you will need to turn off automatic payments.

Consider placing a fraud alert or credit freeze

Depending on the severity of the situation, you may want to consider placing a fraud alert or credit freeze on your credit file. A fraud alert notifies potential creditors to take extra steps to verify your identity before extending credit, while a credit freeze restricts access to your credit report, making it more difficult for identity thieves to open new accounts in your name.

Conclusion

Credit and debit cards are indispensable tools in today’s financial landscape, offering convenience, security, and rewards to consumers.

From everyday purchases to online transactions, these cards have revolutionized the way we shop and manage our finances. Plus, as long as you make your payments on time and monitor your card’s security, you can yield great benefits from cards with reward programs.

Yet, one of the most important aspects of using a credit card is the role it can play in building a positive credit score and credit history. Depending on where you’re from, credit scores and history can be quite different in the United States when compared to other countries.

In the next article, we will delve into the importance of your credit history and your credit score. We’ll look at how to build a positive credit history, and your credit score’s impact on financial health. Specifically, we will examine strategies for responsible credit card use such as paying balances on time. By adopting these practices, you’ll be able to navigate the world of credit and debit cards with confidence and empower yourself to make informed decisions to achieve your long-term goals.

The content provided by U.S. Language Services is for general information and educational purposes only, not a substitute for professional legal or financial advice. Despite our efforts to ensure accurate and timely content, we do not guarantee the completeness, correctness, or suitability of the information on our site or any linked content.

U.S. Language Services is not a law firm; its content should not be taken as legal advice. For specific legal concerns, please consult a licensed attorney. Similarly, financial information on our site is for informational purposes only, not financial advice. Consult a certified financial advisor or tax professional for advice tailored to your situation.

By accessing U.S. Language Services, you acknowledge that it does not provide legal or financial advice. You agree not to rely on its content as such. U.S. Language Services and its contributors bear no liability for any inaccuracies, losses, or damages resulting from the use of information on our site.