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This chapter is from the book

Choosing a Credit Card That Will Benefit Your Bottom Line

Comparison shopping is the best way to find a card with the right perks for you. Before we get to fun subjects like deciphering the fine print in credit card offers, let's quickly go over the basic characteristics of a credit card.

One of the easiest ways to understand how a credit card works is to compare it to a debit card. Even though a debit and credit card look the same, their functions are very different.

Credit Card Basics

Every time you use a credit card, you're actually borrowing money from a bank or other financial institution. When you charge something, the card-issuing bank pays what you owe to the merchant that accepted your card for payment. In turn, you pay the money back to the bank.

By signing up for a credit card, you agree to pay back the money that you borrow, plus any interest or finance charges that accrue on the amount you owe until you've paid it all back. Put simply, credit cards are a type of loan.

Debit Card Basics

Most banks now give you the option of using a debit or check card to get instant access to the money in your checking account. When you use one, your bank takes the funds directly from your bank account on the same day or soon thereafter.

With a debit card, you don't have to carry cash or checks, and you don't have to pay interest or finance charges. Now that they're accepted at a variety of places, including gas stations, grocery stores, restaurants, and retail stores worldwide, it's no surprise that debit cards are becoming more popular. In fact, for the first time, debit card usage actually surpassed credit card usage in 2006.

Debit or Credit—Which Is Better?

The answer is, it depends. How careful are you? How do you actually use your card? Can you trust yourself not to rack up a pile of debts?

The features that make debit cards convenient—instant access to your money, plus the ease of not having to write a check and often not having to drag out your photo ID—also make fraud much easier. Unless reported quickly, theft of your debit card can quickly deplete your bank account.

A thief can spend all the money in your checking account in a matter of minutes, leading to bounced checks, overdraft fees, and a major headache! This is where there's a big difference between credit and debit cards.

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